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1922 


THE  CAPITALIZATION  OF  GOODWILL 


BY 


KEMPER  SIMPSON 


Ji 


A  DISSERTATION 

Submitted  to  the  Board  ot  University  Studies  of  The  Johns 

Hopkins  University  in  confcrmity  with  the  Requirements 

for  the  degree  of  Doctor  of  Philosophy 

1917 


BALTIMORii 
1921 


1'  Ij 

I    Ulb. 


EXCHANGE 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/capitalizationofOOsimprich 


THE  CAPITALIZATION  OF  GOODWILL 


THE  CAPITALIZATION  OF  GOODWILL 


BY 

KEMPER  SIMPSON 


A  DISSERTATION 

Submitted  to  the  Board  of  University  Studies  of  The  Johns 

Hopkins  University  in  conformity  with  the  Requirements 

for  the  degree  of  Doctor  of  Philosophy 

1917 


Baltimore 
1921 


Copyright  1921 
THE  JOHNS  HOPKINS  PRESS 


PRESS  OF 

THE  NEW  ERA  FRINTINQ  COMPANY 

LANCASTER,  PA. 


1/ 

i 


CONTENTS 

Page 

Preface vii 

Chapter        I.     Introduction 9 

Chapter      II.    The  Development  of  a  New  Type  of 

Stock  Flotation 15 

Chapter     III.    The  Motives  of  the  Owners  and  the 

Bankers 23 

Chapter     IV.    The  Method  of  Flotation 33 

Chapter       V.     The  Principles  of  Capitalization  ....  37 
Chapter     VI.     The  Seven  Per  Cent  Preferred  Stocks 

and  Their  Provisions 53 

Chapter   VII.    The  Success  of  the  New  Industrial 

Corporations 68 

Chapter  VIII.     A  Social  Estimate  of  the  New  Indus- 
trial Corporations 78 

Appendices 83 


4 


^•^^003 


PREFACE 


This  monograph  had  its  origin  in  an  investigation  carried 
on  by  the  author  while  a  member  of  the  economic  seminary 
of  the  Johns  Hopkins  University.  The  actual  material 
was  obtained  for  the  most  part  from  bankers  actively 
engaged  in  the  flotations  described.  Mr.  Henry  Goldman 
of  Goldman,  Sachs  &  Co.,  New  York,  and  Mr.  Abel  Rosen- 
burg  of  Frank,  Rosenburg  &  Co.,  Baltimore,  aided  the 
author  in  obtaining  material  and  information.  Acknowl- 
edgement is  made  to  Merrill,  Lynch  &  Co.,  to  Ladenburg, 
Thalmann  &  Co.  of  New  York,  and  to  Stein  Bros,  of 
Baltimore.  Finally,  the  author  wishes  to  express  his  appre- 
ciation of  the  helpful  criticism  received  from  Professor  J.  H. 
Hollander,  Professor  G.  E.  Barnett,  and  from  the  other 
members  of  the  economic  seminary  in  the  Johns  Hopkins 
University.  Some  of  the  data  in  the  first  two  chapters  was 
presented  in  entirely  different  form  in  articles  in  "The 
Annalist." 

K.  S. 


vu 


THE  CAPITALIZATION  OF  GOODWILL 


CHAPTER   I 

Introduction 

In  the  United  States  during  the  last  decade  there  came 
into  prominence  a  type  of  industrial  corporation,  the  study 
of  which  constitutes  an  important  part  of  the  field  of  cor- 
poration finance  and  takes  on  perhaps  even  a  larger  signifi- 
cance from  its  economic  implications.  The  emergence  of 
a  new  type  of  corporation  was  the  accompaniment  and  the 
result  of  a  new  and  changed  economic  condition.  A  glance 
at  the  quotations  of  any  of  the  stock  exchanges  of  today  will 
disclose  a  considerable  number  of  proper  names  in  the  titles 
of  the  corporations  represented.  Sears  Roebuck,  Stude- 
baker,  Julius  Kayser,  Willys-Overland,  and  F.  W.  Wool- 
worth  appear  along  with  the  United  States  Steel  Corpora- 
tion, the  United  States  Rubber  Co.,  and  the  International 
Harvester  Co.  The  appearance  of  these  proper  names  on 
the  stock  exchange  has  an  interesting  economic  significance. 
These  companies  had  been  for  the  most  part  originally 
private  businesses  begun  in  a  small  way  by  the  men  whose 
names  they  bore.  As  these  businesses  grew,  most  of  them 
were  incorporated  in  order  to  obtain  the  legal  advantages 
of  the  corporation  and  to  escape  the  inconveniences  of  the 
partnership  and  of  the  private  business.  These  incorpora- 
tions, however,  ordinarily  brought  about  no  change  in  the 
methods  of  financing  employed.  Later,  as  these  businesses 
expanded  they  found  difficulty  in  financing  themselves  in 
the  usual  way  through  the  commercial  banks,  or  their 
owners  desired  to  withdraw  their  capital  investments. 
They  were  then  reincorporated  in  order  to  issue  seven  per 
cent  stock  to  be  sold  on  the  stock  exchange. 

9 


10  THE  CAPITALIZATION  OF  GOODWILL 

The  rise  of  this  new  class  of  industrials  is  associated  with 
the  increasing  size  of  the  industrial  business  unit,  and  with 
the  extension  of  the  once  limited  field  of  incorporation  and 
of  corporation  finance.  It  is  doubtful,  however,  whether 
these  businesses  would  have  assumed  the  form  they  did, 
and  whether  such  reincorporations  would  have  spread  in 
the  way  they  did,  had  it  not  been  for  the  investment 
bankers.  The  other  fields — railroads,  public  utilities,  and 
industrial  combinations — had  been  so  thoroughly  exploited 
that  this  new  type  of  flotation  was  eagerly  sought.  The 
more  important  events  in  corporation  finance  since  1890 
ay  be  enumerated  as  follows :  the  spread  of  combination 
between  1886  and  1890;  the  enactment  of  the  Sherman 
Anti-Trust  law  of  1890;   the  ineffectiveness  of  this  statute 

/       for  twenty  years  after  its  passage;    the  failures  and  re- 

/        organizations  of  the  great  "trusts"  from  1900  to  1905; 

I  the  panic  of  1907,  followed  by  reaction  and  than  by  the 
prosperity  of  the  years  from  1910  on;  the  anti-trust  activi- 
ties which  started  in  the  Northern  Securities  Case  and  which 
culminated  in  the  Standard  Oil  and  Tobacco  decisions  of 
1911;  and  the  rise  of  the  new  flotations  here  considered 
in  1911  and  1912.  For  a  number  of  reasons,  the  last  of 
these  events  is  logically  connected  with  the  preceding  events. 

^^,.-^'  There  was  more  than  one  motive  which  influenced  the 
owners  to  reincorporate  their  businesses  for  purposes  of 
flotations.  The  economic  background  and  the  part  which 
the  bankers  played — as  well  as  the  motives  of  the  owners — 
are  considerations  of  importance  and  will  be  discussed  in 
detail  in  this  study.  From  one  point  of  view,  these  busi- 
nesses were  reincorporated  merely  in  order  to  sell  preferred 
stock.  Incorporations  of  this  kind  were  not  brought  about 
by  the  desire  for  combination,  nor  were  the  purely  legal 
advantages  responsible.  Most  of  them  were  purely  financial 
expedients,  and  as  such  were  somewhat  different  from  the 
corporations  that  had  existed  before. 

These  industrial  co^rporations  constituted  a  definite  class 
of  corporations,  not  merely  because  they  came  at  the  same 
time,  because  they  were  the  results  of  the  same  motives, 


INTRODUCTION  II 

and  because  they  had  the  same  purposes,  but  because  of 
their  great  similarity  in  form  and  in  construction.  The 
actual  mechanism  of  the  flotation  was  so  simple  and  so 
much  the  same  in  most  instances  that  it  can  be  explained 
here  in  a  few  words.  Whether  the  banker  approached  the 
successful  business  man  or  whether  the  owner  sought  out 
the  banker,  the  process  was  practically  the  same.  The 
owner  sold  his  business  to  a  newly  created  corporation, 
which  paid  him  an  issue  of  seven  per  cent  preferred  stock 
and  an  issue  of  common  stock.  The  preferred  stock  was 
supposed  to  bear  some  definite  relation  to  the  tangible 
assets,  and  was  usually  covered  by  them.  Behind  the 
common  stock  something,  known  variously  as  "goodwill" 
or  earning  power,  was  supposed  to  stand;  as  a  matter  of 
fact,  the  common  stock  was  justified  solely  by  the  knowledge 
that  the  business  earned  or  was  hoping  to  earn  more  than 
enough  to  pay  the  preferred  dividends.  Sometimes  second 
preferred  stock  was  issued,  and  sometimes  bonds;  but  this 
was  not  typical  and  was  the  result  of  unusual  circumstances. 
The  preferred  stock  was  sold  in  the  market  and  the  pro- 
ceeds were  used  in  the  different  ways  already  described. 
The  owner  held  the  greater  part  of  the  common  stock  and 
with  it  the  control  of  the  business.  The  banker,  who  was 
usually  paid  for  his  work  by  a  common  stock  bonus,  would 
sometimes  market  his  block  of  common,  thereby  "creating 
an  appetite  for  that  particular  kind  of  stock  so  that  if  in 
the  future  the  owner  wanted  to  dispose  of  a  part  of  his 
holdings  there  would  be  a  ready  market  for  it."  Of  course, 
there  were  many  exceptions  to  the  rule,  but  on  the  whole 
the  essential  features  of  these  industrials  were  the  same. 
An  issue  of  seven  per  cent  preferred  stock,  marketed  through 
one  of  a  few  well  known  investment  bankers,  an  issue  of 
common  stock  held,  at  least  for  a  short  time,  by  the 
men  who  were  responsible  fo^  the  success  of  the  business, 
and  an  almost  stereotyped  method  of  capitalization  wete 
the  criteria  of  the  class. 

One  of  the  most  distinctive  features  of  these  corporations 
was  the  kind  of  preferred  stock  which  they  created.    There 


12  THE  CAPITALIZATION  OF  GOODWILL 

had  been  preferred  stocks  before,  and  there  had  been 
preferred  stocks  guaranteeing  from  four  per  cent  to  as  high 
as  ten  per  cent,  but  there  had  never  been  a  class  of  cumula- 
tive preferred  stocks  to  which  there  had  been  appended 
such  a  series  of  carefully  worked  out  provisions  of  a  marked 
similarity.  A  seven  per  cent  industrial  preferred  stock 
came  to  mean  something  almost  as  definite  as  a  United 
States  government  bond.  Industrial  corporations,  very 
similar  in  structure  to  these,  existed  before  the  issues  of 
Sears  Roebuck  and  the  United  Cigar  Manufacturers  were 
floated  in  1906.  But,  as  a  class,  these  industrials  have 
existed  only  for  a  little  more  than  a  decade ;  and  they  have 
been  a  factor  of  importance  for  only  about  half  of  that  time. 

Naturally,  the  short  time  these  companies  have  been  in 
existence  makes  it  difficult  to  form  any  satisfactory  judg- 
ment of  their  success.  Furthermore,  the  number  of  com- 
panies which  conform  strictly  to  the  type  is  not  nearly  so 
large  as  it  promises  to  become.  Many  companies,  which 
were  exactly  like  the  typical  examples  already  described, 
did  not  market  their  preferred  or  common  stock  on  the 
public  exchanges.  Many  companies,  which  might  have 
been  listed  on  the  smaller  exchanges  and  eventually  on  the 
New  York  Stock  Exchange,  sold  their  stock  privately. 
These  companies  were,  for  the  most  part,  smaller;  but 
this  was  not  always  true. 

From  the  theoretical  economist's  point  of  yiew  these 
incorporations  have  an  especial  interest  since  they  represent 
a  definite  division  between  the  functions  of  the  entre- 
preneur and  of  the  capitalist.  In  the  typical  capitalization 
of  this  class,  the  preferred  stock  holder  is  the  capitalist 
and  is  paid  interest.  The  high  rate  is  probably  explained 
by  the  risk  involved;  when  the  risk  is  not  great,  he  pays 
more  than  par  for  the  stock.  He  assumes  the  capitalist's 
function  which  the  original  owner  in  some  cases  entirely 
surrenders.  (The  accountant's  misconception  when  he 
treats  preferred  dividends  different  from  bond  interest  is 
apparent) .  As  long  as  the  original  owners  hold  the  common 
stock,  they  perform  a  purely  entrepreneurial  function.     In 


INTRODUCTION  1 3 

some  cases  it  was  definitely  provided  at  the  time  of  incor- 
poration that  the  original  owners,  who  had  been  responsible 
for  the  success  of  the  business,  must  retain  their  common 
stock  holdings  for  a  certain  period. 

The  subsequent  sale  of  the  common  stock  by  the  original 
owners  represents  one  of  the  most  important  problems  of 
these  flotations.  So  long  as  the  common  stocks  are  closely 
held  by  the  original  owners,  it  makes  no  difference  into 
how  many  shares  they  are  divided.  But  the  sale  ot  the 
common  stock  in  the  market  represents  the  social  capitaliza- 
tion of  a  large  amount  of  industrial  goodwill.  The  sale 
of  a  part  of  the  common  stock,  however,  does  not  mean  the 
surrender  of  the  entrepreneur's  function,  because  the  entre- 
preneur's function  implies  control.  Common  stock  is  en- 
titled to  vote,  but  a  small  holding  of  common  stock  does 
not  represent  very  much  of  the  entrepreneur's  function. 
The  sale  of  a  small  block  of  industrial  common  stock  is  not 
very  different  from  the  sale  of  preferred  stock.  Common 
stocks  so  sold  might  be  thought  of  as  second  preferred 
stocks,  except,  of  course,  that  they  have  no  preference 
as  to  income  and  assets.  Inasmuch  as  the  risk  inherent  in 
these  common  stocks  is  usually  considerable,  they  ordinarily 
sell  at  low  prices.  The  purchaser  of  common  stock  who 
buys  for  investment,  and  not  for  the  purpose  of  exerting 
control  or  direction,  has  little  of  the  entrepreneurial 
function. 

The  sale  of  these  industrial  common  stocks,  then,  is  the 
sale  and  capitalization  of  goodwill.  Of  course,  a  part  of  the 
preferred  issue  may  have  no  actual  investment  behind  it, 
but  this  is  unusual.  The  sale  of  the  preferred  stock  could 
be  justified  as  the  sale  of  the  original  investment,  but  the 
sale  of  the  common  stock  is  more  difficult  to  justify.  The 
entrepreneur's  share  is  thereby  transferred  into  a  capitalist's 
share.  The  consequent  claim  upon  the  invested  capital  of 
society  in  many  cases  cannot  be  justified.  These  flotations 
have  often  made  possible  a  gross  over-capitalization  of 
industrial  goodwill. 

When  the  entire  common  stock  is  sold  by  the  original- 


14  THE  CAPITALIZATION  OF  GOODWILL 

owners,  the  possibility  presents  itself  that  the  investor  in 
preferred  or  common  stock  has  purchased  a  security  less 
safe  than  he  was  led  to  believe.  For  this  reason,  prudent 
investment  bankers  usually  insist  that  the  men  who  have 
been  responsible  for  the  success  of  a  business  must  not 
dispose  of  their  common  stock  holdings,  and  must  take  the 
same  interest  in  the  companies  as  they  did  before  their 
investment  was  withdrawn.  As  investments,  the  first 
preferred  stocks  have  proved  their  value.  The  same,  how- 
ever, cannot  be  said  for  the  majority  of  the  common  stocks. 


CHAPTER  II 
[E  Development  of  a  New  Type  of  Stock  Flotation 

The  reasons  why  men  have  preferred  the  corporate  form 
of  business  organization  to  the  partnership  have  been  much 
the  same  throughout  the  history  of  industrial  corpora- 
tions. First,  there  was  the  perpetual  succession  made 
possible  by  legal  authority  and  the  dignity  lent  by  govern- 
mental concession.  Second,  the  corporation  was  the  usual 
form  employed  by  men  who  desired  to  obtain  the  control 
or  the  monopoly  in  a  certain  trade  or  in  a  particular 
industry.  Third,  the  corporation  is  superior  to  the  partner- 
ship as  a  method  of  financing  a  venture  which  requires  a 
considerable  amount  of  capital.  In  the  different  epochs  in 
the  history  of  corporation  finance,  however,  these  different 
motives  have  not  always  had  the  same  importance. 

The  earliest  corporations  in  England  were  the  result  of 
certain  institutions  and  ideas  which  were  vital  in  the 
economic  organization  of  the  Middle  Ages.  The  corporate 
idea  was  developed  in  the  mediaeval  guilds,  where  "the 
conception  of  perpetual  succession  was  implicit."^  The 
internal  government  of  the  guilds  and  their  jurisdiction  in 
economic  affairs  are  important  in  understanding  the  rise 
of  the  regulated  companies,  which  were  practically  guilds 
of  merchants  engaged  in  foreign  trade.  Just  as  in  the  case 
of  the  merchant  guilds,  these  early  companies  had  a  more 
or  less  exclusive  control  of  the  trade  in  which  they  were 
interested.  It  was  with  the  joint-stock  companies  that 
corporation  finance  emerged.  These  companies,  which 
carried  on  foreign  trade  and  later  manufacturing,  undertook 
ventures  which  individuals  could  not  have  financed.  Shares 
were  thus  created;  and  those  who  financed  the  ventures, 
the  shareholders,  were  capitalists  as  well  as  entrepreneurs. 

^  W.  R.  Scott,  Joint-Stock  Companies  to  1720,  vol.  i,  chap.  i. 

15 


l6  THE  CAPITALIZATION  OF  GOODWILL 

The  dignity  adhering  to  the  corporation,  which  was  evinced 
by  the  common  seal  and  the  crests  of  the  eariiest  companies, 
was  a  feature  which  it  is  hard  to  overestimate.  As  a  matter 
of  fact,  not  all  of  the  joint-stock  companies  had  control 
of  the  trade  in  which  they  were  engaged;  and,  later, 
monopoly  became  unusual.  Furthermore,  corporation  fi- 
nance as  it  is  understood  today  was  not  possible  until  the 
limited  liability  provision  was  developed  in  the  middle  of 
the  seventeenth  century. 

The  use  of  the  corporate  form  of  organization  to  control 
trade  or  industry  was  exemplified  at  a  much  later  epoch  in 
the  history  of  industrial  corporations.  This  use  of  the 
corporate  form  was  popularly  known  as  the  "trust  move- 
ment," and  played  one  of  the  most  important  r61es  in  the 
economic  history  of  the  United  States.  In  England,  in  the 
early  years  of  the  eighteenth  century,  the  United  East 
India  Company  was  formed  as  a  consolidation  of  seven 
diff"erent  organizations. ^  But  the  so-called  trust  movement 
in  England  came  at  about  the  same  time  as  in  the  United 
States,  and  that  was  not  until  after  the  Civil  War.  Simeon 
Baldwin's  list  of  private  incorporations  in  the  United  States 
before  1800  records  but  225,  of  which  only  12  were  devoted 
to  manufacturing.  Between  1800  and  the  Civil  War  the 
expansion  in  our  industry  necessitated  a  more  extensive 
use  of  the  corporate  form  in  industry,  but  it  was  not  until 
about  i860  that  the  industrial  combination  and  trust  move- 
ment became  a  feature  in  our  national  Hfe.^  Starting  with 
the  pools  in  the  cordage  industry  in  i860,  combination 
spread  over  all  industry.  The  formation  of  an  employers' 
association,  or  even  a  chance  social  gathering  of  men,  in- 
fluential in  a  particular  industry,  led  not  infrequently  to 
agreements  and  common  rules.  A  loose  combination  of 
some  kind  was  inevitably  the  next  step.  Only  a  short  time 
elapsed  before  the  advantages  of  the  corporate  methods  of 
financing  in  the  formation  of  such  combinations  were  recog- 
nized and  made  use  of  wherever  possible. 

2  Ibid.,  vol.  i,  chap.  xix. 

'  W.  H.  S.  Stevens,  Industrial  Combinations  and  Trusts,  The  Mac- 
millan  Company,  1913,  p.  i. 


DEVELOPMENT  OF  NEW  TYPE  OF  STOCK  FLOTATION       1 7 

In  the  period  from  i860  there  were  two  kinds  of  incorpora- 
tions which  brought  together  separate  properties:  there 
were  those  by  which  a  number  of  businesses  already  in 
operation  were  combined,  ostensibly  to  obtain  the  advan- 
tages of  large  scale  production,  but  actually,  in  most  cases, 
to  effect  a  monopoly;  and  there  were  those  incorporations 
which  were  developed  by  men  who  saw  the  possibility  of 
the  development  of  an  industry  and  who  bought  up  the 
necessary  properties  from  those  who  had  owned  them.  In 
the  first  class,  the  idea  of  combination  might  have  occurred 
to  the  owner  of  one  of  the  combined  businesses;  nor  is  it 
necessary  to  think  of  an  outside  promoter  as  a  factor  in  the 
combination.  But  in  the  second  class,  the  outside  promoter 
was  usual.  That  one  of  these  methods  was  as  common  as 
the  other  suggests  the  reason  why  the  inside  promoter  and 
the  outside  promoter  came  to  be  thought  of  as  equally 
probable  contingencies.  This  fact  is  important  in  under- 
standing the  class  of  promotions  which  constitute  the  sub- 
ject of  this  study. 

It  appears  that  it  was  as  far  back  as  1865  that  the  com- 
bination in  oil  was  first  begun,  and  though  it  was  begun  in 
a  small  way,  the  economic  organization  in  which^it  was 
placed  was  a  rapidly  expanding  one.  The  industrial  de- 
pression from  1873  to  1877  niade  people  consider  the  evils 
of  economic  organization,  and  the  combinations  came  in 
for  their  share  of  criticism.  The  Standard  Oil  Trust  was 
formed  in  1882,  but  this  was  a  mere  formality  as  the  trade 
had  already  been  monopolized  long  before.  Other  trusts 
sprang  up,  and  in  1885  Congress  gave  up  its  former  attitude 
of  non-interference  with  private  matters  and  abandoned  its 
laissez-faire  policy.  After  two  years  of  discussion  the  Inter- 
state Commerce  Act  was  passed.  This  was  followed  in 
1890  by  the  Sherman  Anti-Trust  Law,  which  has  been 
called  the  most  important  statute  in  our  history.  The 
excitement  it  caused  was  only  equalled  by  that  in  the  Dred 
Scott  case;  however,  its  effect  was  far  less  important  than 
might  have  been  expected.  Walker,  in  his  book  on  the 
history  of  the  Sherman  law,  has  summarized  the  results 


1 8  THE  CAPITALIZATION  OF  GOODWILL 

attained  under  this  law  for  each  administration.^  The 
conclusions  of  his  chapters  will  be  presented  in  order  to 
show  the  results  of  the  passage  of  this  act. 

The  Sherman  law  was  passed  in  1890  during  Harrison's 
administration.  He  was  president  thirty-two  months  after 
it  went  into  effect.  Walker  states:  "It  is  apparent  that 
the  Sherman  law  was  never  used  to  any  considerable  extent 
as  an  instrument  for  the  promotion  of  justice,  or  for  the 
prevention  of  injustice,  at  any  time  prior  to  the  end  of  the 
administration  of  President  Harrison."  In  Cleveland's 
administration,  eight  of  the  ten  cases  under  the  law  were 
concerned  with  labor  organizations.  Walker's  analysis  of 
these  cases  shows  that  the  practical  effect  of  this  law  in  the 
four  years  from  1893  to  1897  was  insignificant.  "The 
eleven  litigations  relevant  to  the  Sherman  law  between 
private  parties  which  occurred  during  McKinley's  adminis- 
tration ( 1 897-1 901)  included  eight  cases  in  which  that  law 
was  invoked  in  vain,  and  two  cases  in  which  it  was  success- 
fully invoked  by  the  defendants,  and  only  one  case  in  which 
it  was  successfully  invoked  by  a  plaintiff  on  a  complaint 
as  a  means  of  remedying  a  wrong  which  had  been  inflicted 
by  the  defendants  in  violation  of  that  law."  Walker  says: 
"Not  even  one  'trust'  accurately  so  called  was  ever  prose- 
cuted prior  to  the  end  of  McKinley's  administration  for 
violation  of  the  Sherman  law;  and  only  two  such  prosecu- 
tions were  begun  prior  to  that  time  against  any  holding 
company,  as  if  they  were  trusts." 

The  financial  straits  which  led  up  to  the  panic  of  1893 
and  the  monetary  difficulties  thereafter  would  suggest  that 
this  was  no  period  for  promotions  of  any  kind.  Between 
1890  and  1893,  however,  the  starch,  the  leather,  and  the 
cordage  consolidations  were  effected.  The  victory  of  the 
gold  party  in  1896,  the  trade  revival  in  1898,  and  the  rail- 
road and  industrial  expansion  that  followed  were  accom- 
panied by  a  considerable  number  of  combinations;  yet  no 
interference  from  the  Sherman  law  was  encountered.  In 
the  Northern  Securities  Case  (i  902-1 904)  there  appeared 

*  A.  H.  Walker,  History  of  the  Sherman  Law  of  the  United  States  of 
America,  19 10. 


DEVELOPMENT  OF  NEW  TYPE  OF  STOCK  FLOTATION       I9 

in  the  courts  for  the  first  time  an  effective  anti-trust  feehng. 
The  final  culmination  of  this  feeling  came  about  in  the 
Standard  Oil  and  Tobacco  decisions  of  191 1.  Aside  from 
the  effect  on  judicial  opinion  of  the  trust  abuses,  there  was 
growing  in  the  minds  of  the  people  a  feeling  against  com- 
bination engendered  by  the  great  number  of  failures  be- 
tween 1900  and  1907.  Two- thirds  of  the  combinations  that 
Dewing  describes  failed  or  were  reorganized  in  the  first 
years  of  the  century.^  The  Rich  Man's  Panic  and  the 
Armstrong  Investigation  aroused  further  the  public  dis- 
trust of  "big  business."  The  bad  effects  of  the  panic  of 
1907  had  hardly  worn  off  before  the  Standard  Oil  and 
Tobacco  decisions  convinced  bankers  and  investors  that  a 
combination  of  competing  businesses  was,  at  best,  a  doubt- 
ful basis  for  the  issue  of  securities. 

A  new  class  of  industrials  invaded  the  stock  market  in 
191 1  and  1 912.  These  industrials  were  incoiporated  private 
businesses  or  reincorporated  closed  corporations  formed 
for  the  purpose  of  issuing  stock  and  selling  it  in  the  market. 
Before  this  many  private  businesses  and  partnerships  had 
been  converted  into  corporations  because  of  the  very 
obvious  legal  advantages  to  be  gained,  but  the  sale  of  a 
business  to  a  corporation  in  return  for  an  issue  of  stock 
to  be  listed  on  the  exchange  was  at  that  time  a  new  thing. 
Prior  to  1900  some  well  known  businesses  had  been  incor- 
porated and  had  issued  preferred  stocks  to  be  sold  in  a 
limited  area.  Some  few  small  private  businesses  that  had 
been  converted  into  corporations  were  listed  on  the  ex- 
changes of  the  Middle  West;  between  1900  and  1906  they 
increased  considerably.  Among  these  a  few  small  issues  of 
department  stores  are  noteworthy. 

In  1906  Mr.  Henry  Goldman,  of  Goldman,  Sachs  and  Co., 
brought  out  the  United  Cigar  Manufacturers  and  Sears 
Roebuck.  Before  the  panic  of  1907,  this  banker  had  ap- 
praised the  value  of  a  great  private  business  as  the  basis  of 
a  flotation,  and  the  New  York  Stock  Exchange  became 

^  Arthur  Stone  Dewing,  Corporate  Promotions  and  Reorganizations, 
Harvard  University  Press,  1914. 


20  THE  CAPITALIZATION  OF  GOODWILL 

acquainted  with  a  new  kind  of  industrial  corporation.  For 
a  few  years  after  the  panic  any  activity  of  this  kind  would 
have  been  impossible,  but  with  the  coming  of  better  times 
in  1 910  a  few  promotions  appeared,  the  most  notable  of 
which  were  the  work  of  Mr.  Henry  Goldman.     It  was  in 

1911  and  1912  that  industrials  of  this  type  first  became 
prominent.  They  may  be  considered  as  constituting  a 
distinct  class  of  corporations,  and  as  representing  a  new 
epoch  in  corporate  development.  Some  of  the  same  motives 
which  actuated  the  earliest  incorporations  are  present,  but 
in  different  degrees.  As  the  historical  study  shows,  these 
flotations  were  in  a  large  degree  the  result  of  the  reaction 
against  combinations.  Naturally,  they  have  not  that  fea- 
ture which  has  been  so  often  associated  with  the  corpora- 
tion, that  is,  the  control  of  the  trade  or  the  industry.  The 
primary  motive  of  the  incorporators  of  these  industrials 
is  the  desire  to  obtain  the  financial  advantages  which  the 
corporate  form  of  organization  offers.  It  gofes  without 
saying  that  often  the  legal  advantages  of  the  corporation 
have  a  large  appeal  for  the  ordinary  business  man.  Of 
course  he  can  incorporate  and  have  perpetual  succession 
without  selling  stock  on  the  exchange,  but  it  is  partly  the 
importance  and  the  dignity  attaching  to  a  public  flotation 
that  influences  him.  Moreover,  the  advertising  value  in 
being  listed  on  the  exchange  is  considerable. 

The  history  of  the  spread  of  these  companies  in  191 1  and 

1 91 2  and  the  subsequent  growth  of  the  movement  is  not 
Qnly  interesting  but  is  also  valuable  in  the  solution  of  one 
of  the  most  important  problems  dealt  with  in  the  following 
chapter, — the  motives  of  the  incorporators.  The  particular 
question  on  which  the  history  throws  light  is  whether  it  is 
the  banker  or  the  owner  who  is  to  be  held  responsible  for 
the  rise  and  spread  of  these  industrial  corporations. 

In  1912  the  B.  F.  Goodrich  Co.  was  reincorporated  with 
the  issue  of  ninety  million  dollars  of  stock.^  Shortly  before 
this,  the  bankers,  Goldman,  Sachs  and  Co.,  had  planned  the 
reincorporation  of  B.  F.  Goodrich  with  about  forty-five 

^  See  appendix  iii. 


DEVELOPMENT  OF  NEW  TYPE  OF  STOCK  FLOTATION   2 1 

million  dollars  of  stock.  That  the  flotation,  as  finally  put 
out,  was  twice  as  large  as  the  one  originally  proposed  is 
explained  by  the  fact  that  meanwhile  the  Diamond  Rubber 
Co.  approached  the  same  bankers  with  a  view  to  incorpora- 
tion, or  rather,  reincorporation.  These  bankers  brought  the 
two  competitors  together  and  finally  combined  them  in  one 
company.  In  the  interval  between  the  incorporation  of 
the  original  B.  F.  Goodrich  Co.  and  its  acquisition  of  the 
Diamond  Rubber  Co.,  the  Goodyear  Rubber  and  Tire  Co. 
was  reincorporated.  The  Goodyear  flotation  and  the  Fisk 
flotation,  which  followed  in  October  of  the  same  year,  were 
the  work  of  William  Salomon  &  Co.  From  the  five  million 
dollars'  worth  of  preferred  stock  issued  by  Goodyear,  four 
million  dollars  were  obtained  by  the  business  for  working 
capital;  from  the  three  million  dollars  of  preferred  stock 
issued  by  Fisk,  two  million,  four  hundred  thousand  dollars 
were  returned  to  the  business,  avowedly  for  working  capital, 
partly  perhaps  for  the  liquidation  of  indebtedness. 

The  spread  of  flotations  in  the  chains  of  five  and  ten  cent 
stores  started  when  in  January,  19 12,  Goldman,  Sachs  &  Co. 
brought  out  the  F.  W.  Woolworth  stock. ^  This  was  the 
first  of  the  five  and  ten  cent  chain  flotations;  its  beginnings 
have  an  almost  romantic  interest.  The  men  who  owned 
the  several  chains  that  were  combined  in  this  flotation 
grew  up  together  in  the  same  little  town.  They  had  always 
looked  forward  to  the  time  when  this  combination  might  be 
effected.  When  an  incorporation  was  suggested  to  them 
they  were  in  a  thoroughly  receptive  mood.  There  seems 
to  have  been  no  particular  need  for  this  kind  of  financing 
except  as  a  method  of  allowing  the  owners  to  withdraw  their 
investments  of  capital.  Later  in  the  same  year  the  Kresge 
flotation  occurred.  The  purpose  of  this  reincorporation 
was  the  withdrawal  of  capital.  The  sale  of  preferred  was 
neither  for  expansion,  nor  for  liquidation.  Whether  Kresge, 
emulating  Woolworth,  sought  out  the  financiers,  or  whether 
they  went  to  him  is  an  unessential  consideration.  It  is 
enough  to  say,  that  the  movement  in  this  field  that  was 

'  See  appendix  iv. 


22  THE  CAPITALIZATION  OF  GOODWILL 

started  by  the  bankers  resulted  in  the  Woolworth,  the 
Kresge,  and,  a  few  years  later,  the  McCrory  flotations. 

The  incorporation  of  the  private  businesses  in  manu- 
facturing agricultural  implements  started  in  1911.^  In 
that  year  William  Salomon  &  Co.  brought  out  Rumely 
preferred.  The  grandson  of  the  original  founder  had  been 
induced  by  the  bankers  to  consider  the  possibility  of  a 
flotation.  In  the  next  year,  1912,  four  of  the  largest 
businesses  of  the  same  kind  were  incorporated,  or  rein- 
corporated, Emerson  Brantingham,  J.  I.  Case,  the  Moline 
Plow  Co.,  and  Deere  &  Co.  In  a  so-called  "Special 
Memorandum"  of  Emerson  Brantingham  the  following 
words  occur:  "The  acquisition  by  the  Emerson  Branting- 
ham Co.  of  the  assets  and  businesses  of  these  various  com- 
panies is  the  natural  result  of  the  rapid  changes  which  are 
taking  place  in  agricultural  methods  and  the  implement 
industry."  As  "working  capital"  was  acquired  in  prac- 
tically all  of  these  incorporations,  this  excerpt  from  the 
Emerson  Brantingham  prospectus  is  to  be  regarded  as 
significant. 

The  financial  depression  which  accompanied  the  opening 
of  the  European  War  stopped  the  spread  of  these  incorpora- 
tions, but  only  temporarily.  The  great  era  of  prosperity 
which  followed,  when  America  came  to  be  the  producer  for 
the  world,  stimulated  these  promotions  in  a  spectacular 
manner.  Businesses  of  a  kind  which  had  never  been 
thought  of  as  stock  market  possibilities  were  made  the 
bases  of  flotations.  The  bankers  have  sought  out  the 
great  merchants;  and  the  merchants  have  approached  the 
great  bankers. 

8  See  appendix  i. 


CHAPTER  III 
The  Motives  of  the  Owners  and  the  Bankers 

It  is  necessary  to  consider  the  promoter  of  these  industrial 
corporations  and  his  function  before  the  motives  which 
are  responsible  for  the  existence  of  these  corporations  can 
be  understood.  The  pure  promoter,  the  outsider  who 
merely  proposed  the  scheme  to  the  owner  and  who  interested 
the  bankers,  was  usually  not  a  factor  in  these  flotations. 
The  work  of  bringing  together  the  different  units  which 
constituted  a  combination  had  furnished  a  justification 
for  the  outside  promoter;  but  when  enterprises  in  which 
there  was  nothing  to  combine  were  to  be  incorporated,  the 
most  important  function  of  the  outsider  disappeared,  and 
with  it  his  excuse  for  existence.  Some  of  his  other  functions 
were  important,  but  these,  it  is  easy  to  see,  could  be  readily 
assumed  by  others.  Discovering  the  business  organization 
and  obtaining  the  underwriting  syndicate  were  other  neces- 
sary services  which  formerly  were  assumed  to  be,  in  most 
cases,  the  duties  of  the  pure  promoter.  The  occupation  of 
the  promoter  was  attractive  because  his  remuneration 
was  considerable.  It  was,  therefore,  only  natural  that 
those  who  were  forced  to  pay  for  his  services  considered 
the  possibility  of  assuming  his  functions.  The  banker 
coveted  a  part  of  these  profits.  This  interest  of  the  banker 
proved  effective  in  many  cases  in  that  he  was  able  to 
develop  that  specialized  knowledge  which  many  promoters 
had,  but  which  was  beyond  the  capability  of  ordinary 
business  men.  Finally,  the  banker  had  always  been  such 
an  integral  factor  in  the  process,  and  had  so  definite  a 
function  in  his  own  right,  that  it  was  perfectly  natural  for 
him  to  assume  the  other  duties  of  the  promoter. 

Although  the  pure  promoter  can  be  disregarded  in  a 
study  of  these  flotations,  there  still  remains  the  important 
question  as  to  whether  it  was  the  banker  or  the  owner 

23 


24  THE  CAPITALIZATION  OF  GOODWILL 

who  is  to  be  considered  responsible  for  the  actual  promotion. 
There  are  really  two  issues  involved  in  this  question. 
First,  was  it  the  banker  or  the  owner  who  took  the  initiative 
in  the  greater  number  of  cases?  Second,  was  the  movement 
as  a  whole  the  result  of  the  activities  of  the  great  investment 
bankers  or  was  it  brought  about  by  the  great  merchants? 
In  every  promotion  the  banker  must  play  a  very  definite 
r61e;  but  it  seems  somewhat  unwarranted  to  call  him  the 
promoter,  unless  it  was  his  initiative  that  was  responsible 
for  the  incorporation.  It  might  be  established  that  in  the 
large  majority  of  cases  the  banker  was  not  promoter  in  this 
strict  sense,  and  there  would  still  remain  the  important 
question  as  to  whether,  in  a  more  general  way,  bankers 
have  been  responsible  for  the  general  rise  and  spread  of  these 
promotions  during  the  last  ten  years.  It  is  impossible  to 
give  a  dogmatic  or  unqualified  answer  to  either  of  these 
questions.  It  would  seem  that  the  answer  to  the  first 
question  could  be  determined  by  actual  count,  and  that  the 
answer  to  the  second  would  emerge  in  the  history  of  the 
movement.  If  the  testimony  of  the  most  reliable  invest- 
ment bankers  can  be  accepted,  the  number  of  cases  in  which 
the  bankers  sought  out  the  owners  has  been  about  equal  to 
those  in  which  the  owners  sought  out  the  bankers.  The 
second  question,  although  more  difficult  to  answer,  admits 
of  a  more  definitive  settlement.  It  seems  reasonably  clear 
from  the  historical  description  presented  in  the  foregoing 
chapter  that  the  rise  and  spread  of  these  industrials  in 
191 1  and  1912  resulted  primarily  from  the  activities  of  the 
great  investment  bankers. 

The  view  suggested  above  that  bankers  sought  out  large 
successful  businesses  as  a  basis  for  flotations  when  their 
former  sources  of  supply,  that  is,  combinations,  were  no 
longer  available,  however,  like  most  views  needs  qualifica- 
tions which  will  be  best  set  in  their  proper  perspective  by 
some  consideration  of  the  other  views  as  to  the  genesis  of 
these  corporations. 

One  set  of  these  theories  is  associated  with  the  motives 
of  the  owners.     "The  owners  of  successful  businesses  after 


MOTIVES  OF  OWNERS  AND  BANKERS  2$ 

reaching  a  certain  age  wish  to  incorporate  and  they  seek 
the  necessary  financial  agents  in  order  to  withdraw  their 
capital  and,  at  the  same  time,  retain  the  management,'* 
was  a  suggestion  offered  both  by  a  student  of  corporation 
finance  and  by  a  shrewd  investment  banker.  The  student 
suggested  that  in  a  majority  of  cases  the  incorporations 
would  be  found  to  have  occurred  about  twenty  years 
after  the  founding  of  the  businesses.  The  actual  facts 
show  there  is  no  uniformity  in  the  number  of  years  that 
elapsed  before  incorporation,  and  that  if  there  is  any 
number  of  years  more  common  than  others  it  is  some- 
where around  forty.  Furthermore,  it  is  clear  that 
there  are  comparatively  few  incorporatio^ns  for  which 
the  withdrawal  of  capital  was  the  sole  motive.  Finally, 
often  when  the  withdrawal  of  capital  was  effected,  it  ap- 
pears that  it  was  in  the  nature  of  an  inducement  offered 
by  the  promoting  banker  rather  than  the  motive  of  the 
owner  which  made  them  seek  the  banker. 

A  second  theory  of  this  kind  emphasizes  the  fact  that 
in  the  great  number  of  promotions  of  191 1  and  191 2  the 
acquisition  of  capital  for  expansion  or  for  the  liquidation 
of  indebtedness  was  sought.  It  suggests  that  the  industrial 
expansion  and  the  difficulty  of  obtaining  capital  in  those 
years  induces  owners  of  well  known  businesses  to  incor- 
porate. Although  this  theory  does  not  explain  the  promo- 
tions prior  to  191 1  and  1912,  and  although  it  is  known  to 
be  insufficient  for  many  of  the  incorporations  of  those  two 
years,  it  undoubtedly  has  a  value  which  should  not  be 
neglected.  Many  of  the  companies  incorporated  in  191 1 
and  1912  sold  their  preferred  stock  issues,  or  parts  of  them, 
to  obtain  "working  capital  for  expansion."  Some  of  the 
most  prominent  issues  of  those  years  were  of  this  kind. 
The  Fisk  Tire  Co.,  The  Brown  Shoe  Co.,  the  Julius  Kayser 
Co.,  and  the  Loose  Wiles  Biscuit  Co.,  gave  this  as  the 
principal  reason  for  their  issues.  One  half  of  the  Stude- 
baker  preferred  was  returned  to  the  business  for  working 
capital;  Goodyear  Rubber  Tire  Co.,  and  Moline  Plow  Co. 
wanted  capital  both  for  expansion  and  for  the  liquidation 
of  indebtedness. 


26  THE  CAPITALIZATION  OF  GOODWILL 

It  seems  reasonably  clear  that  the  bankers  first  taught 
the  merchants  the  value  of  this  kind  of  financing.  The 
spread  of  incorporation  in  the  industries,  described  in  the 
foregoing  chapter,  shows  how  the  merchants  profited  by 
the  examples  of  their  competitors.  The  bankers'  initiative, 
displayed  in  the  Goodrich,  the  Woolworth,  and  the  Rumely 
flotations,  resulted  in  the  spread  of  flotations  in  those 
industries.  But  this  theory  of  the  initiation  of  these  pro- 
motions does  not  preclude  the  possibility  that  it  was 
usually  the  owners  who  were  the  seekers  and  the  bankers 
who  were  sought.  Some  of  the  bankers  maintain  that 
the  flotations  which  were  the  result  of  their  initiative  have 
been,  generally  speaking,  the  more  successful  ones.  Im- 
portant as  were  the  bankers  in  the  general  movement,  the 
motives  of  the  owners  to  whom  they  had  to  appeal  and 
the  motives  which  led  so  many  owners  to  take  the  initiative 
deserve  as  much  attention  and  as  detailed  study  as  the 
motives  which  impelled  the  bankers. 

One  of  the  reasons  why  the  bankers  started  these  flota- 
tions has  been  sufficiently  treated;  they  wanted  large, 
successful,  private  businesses  as  bases  for  flotations  at  a 
time  when  prosperity  and  expansion  encouraged  stock 
market  promotions  and  when  combinations  were  considered 
unsafe  and  illegal.  The  most  successful  of  these  bankers 
had  done  a  mercantile  credit  business  which  gave  them  a 
knowledge  of  the  conditions  in  different  industries;  and 
it  was  this  knowledge  which  enabled  them  to  choose  the 
proper  businesses  when  they  saw  that  the  market  could 
absorb  new  securities.  There  was  another,  perhaps  more 
definite,  consideration  which  influenced  them  in  the  direc- 
tion of  their  activities.  In  this  particular  kind  of  flotation 
a  large  amount  of  "watered"  common  stock  was  always 
issued.  At  the  time  of  the  issue  this  common  stock  usually 
had  but  little  value,  since  the  earnings  of  the  businesses 
were  seldom  large  enough  to  warrant  any  dividends  on  the 
common  stock.  The  bankers,  however,  took  pa5anent  for 
their  services  in  large  common  stock  bonuses,  since  they 
saw  that  with  the  growth  of  the  business  the  common  stock 
would  become  more  and  more  valuable. 


MOTIVES  OF  OWNERS  AND   BANKERS  27 

The  arguments,  which  the  bankers  employed  to  justify 
these  large  common  stock  bonuses  and  to  convince  un- 
willing owners  to  part  with  so  large  a  share  of  their  busi- 
nesses, were  apparently  the  following.  First,  said  the 
bankers,  we  are  the  promoters  and  as  such  deserve  a  con- 
siderable remuneration.  Second,  when  our  customers  buy 
the  securities  which  we  offer,  they  must  have  some  assurance 
as  to  our  knowledge  and  our  ability  to  control  or  to  regulate, 
in  some  degree,  the  conduct  of  the  businesses  which  we  float. 
When  we  sell  an  issue  of  stock,  our  reputation  is  dependent 
upon  the  success  or  failure  of  the  business  which  underlies 
that  issue.  Our  only  effective  method  of  supervising  these 
businesses  is  through  the  voting  power  which  attaches  to 
the  common  stock.  Third,  although  it  is  to  the  interest  of 
everyone  concerned  (the  bankers,  the  investors,  and  the 
owners)  that  the  men  who  are  responsible  for  the  success 
of  a  business  should  retain  their  common  stock  as  ong  as 
possible  (and  with  it  their  control  and  interest),  there  will 
come  a  time  when  they  will  have  every  justification  for 
wishing  to  dispose  of  their  holdings  of  common  stock  in  the 
market;  and  this  legitimate  desire  can  best  be  fulfilled  if 
the  bankers  be  given  a  large  enough  block  of  common  stock 
so  as  to  sell  it  or  a  part  of  it  at  the  time  of  the  flotation  and 
cultivate  the  market's  taste  for  that  particular  kind  of 
stock.  These  were  the  arguments  which  enabled  the 
bankers  to  obtain  the  enormous  stock  bonuses  which,  it 
appears,  they  received. 

The  motives  which  were  effective  in  making  the  owners 
desire  these  flotations  and  the  inducements  which  the 
bankers  held  out  to  the  owners  whom  they  wanted  to 
interest  were  of  many  kinds.  Although  the  purely  financial 
advantages  offered  by  these  flotations  and  the  possibility 
of  capitalizing  their  goodwill  were  the  most  important  con- 
siderations, there  were  others  which  cannot  be  neglected. 
Just  as  the  crests,  the  common  seal,  and  the  other  dignities 
which  attached  to  the  early  corporations  made  the  men  of 
the  Middle  Ages  prefer  the  corporate  form  and  its  perpetual 
succession  to  the  private  business  organization,  so  the  fact 


28  THE  CAPITALIZATION  OF  GOODWILL 

that  a  business  was  listed  on  the  New  York  Stock  Exchange 
made  a  large  appeal  to  the  ordinary  American  business  man. 
A  private  business  obtained  in  this  way  a  considerable 
advertisement,  and  was  helped  materially  in  the  develop- 
ment of  its  trade  name.^  The  fact  that  F.  W.  Woolworth 
was  quoted  on  the  New  York  Exchange  may  have  had  some 
effect  on  Kresge  or  McCrory.  The  success  of  Studebaker 
and  of  Hart,  Schaffner  and  Marx,  as  stock  market  ventures, 
stimulated  other  promotions  in  the  automobile  and  cloth- 
ing industries.  The  spread  of  these  incorporations  in  the 
rubber  and  agricultural  implement  industries  and  in  the 
chains  of  five  and  ten  cent  stores  must  be  explained  in  part 
as  due  to  this  motive. 

It  must  be  clearly  understood  that  seldom  was  any 
one  motive  entirely  responsible  for  a  flotation.  Even 
where  there  was  one  motive  which  was  clearly  predominant, 
there  were  others  which  were  contributory.  In  the  numer- 
ous cases  where  the  banker's  motive  was  simply  the  desire 
for  monetary  profit — ^where  the  business  floated  was  not  a 
really  sound  basis  for  this  kind  of  promotion — the  induce- 
ment or  inducements  to  incorporation  which  influenced 
the  owner  must  not  be  neglected. 

One  of  the  great  advantages  which  has  been  associated 
with  the  corporation  throughout  history  was  not  present 
in  these  industrials.  Many  of  the  earliest  corporations 
were  granted  an  exclusive  right  to  a  certain  trade.  A 
number  of  American  corporations  in  an  earlier  period  had 
obtained  what  was  practically  the  same  result  by  combina- 
tion. The  industrials  included  in  this  study  could  attempt 
no  control  of  an  industry.  The  casual  observer  might 
point  to  the  fact  that  many  of  them  were  combinations, 
that  is,  Woolworth,  Kresge,  McCrory,  Kresge,  Jewel  Tea, 
Acme  Tea,  May  Department  Stores,  etc.  These  combina- 
tions, however,  were  very  different  from  those  of  the  trust 
movement.  The  two  purposes  of  combination  are  the 
control  of  an  industry  (maintained  by  the  stifling  of  compe- 

1  This  advertisement  value  was  recognized  by  Goodrich,  Sears 
Roebuck,  and  Underwood  Typewriter. 


MOTIVES  OF  OWNERS  AND  BANKERS  29 

tition)  and  the  advantages  of  large-scale  production  (made 
possible  by  the  law  of  increasing  returns).  But  the  courts 
forbade  restraint  of  trade;  and  investors  became  skeptical 
as  to  the  advantages  of  large-scale  production  after  the 
failures  in  the  first  part  of  the  century.  The  new  industrials 
were  combinations  of  non-competing  businesses,  and  as 
such  did  not  come  into  conflict  with  the  Sherman  law. 
The  organizations  combined  were  retail  and  for  the  most 
part  in  different  cities.  Furthermore,  it  is  obvious  that 
practically  none  of  the  advantages  of  large-scale  production 
were  possible  in  this  kind  of  combination.  Indeed,  these 
businesses,  which  were  owned  in  most  cases  by  the  same 
man  or  group  of  men,  did  not  require  a  flotation  or  even 
incorporation  in  order  to  be  combined ;  nor  was  combination 
ever  a  motive  which  was  effective  in  bringing  about  the 
promotion. 

This  class  of  industrials  was  distinguished  from  those  that 
went  before  by  the  fact  that  the  purely  financial  advan- 
tages of  flotation  influenced  the  owners  of  these  businesses. 
There  were  some  industrials  which  came  at  the  same  period, 
and  which  had  the  same  form  as  those  in  this  class;  but 
they  were  different  in  that  they  were  not  private  businesses 
incorporated  or  corporations  reincorporated.  They  started 
out  as  corporations  and  with  a  public  issue  of  stock,  which 
was  intended  to  obtain  capital  for  the  initial  financing.^ 
The  new  industrials  were  all  private  businesses  incorporated, 
or  closed  corporations  reincorporated,  which  issued  and 
sold  preferred  and  common  stock  in  the  public  market. 

The  sale  of  preferred  stock,  then,  ordinarily  had  one  or 
more  of  three  purposes:  (i)  the  withdrawal  of  the  owner's 
capital;  (2)  the  acquisition  of  working  capital  for  the 
expansion  of  the  business;  (3)  the  liquidation  of  the  in- 
debtedness of  the  business.  These  were  the  three  motives 
of  the  owners,  which  the  remainder  of  this  chapter  will 
treat  in  some  detail. 

The  desire  to  withdraw  capital  is  the  motive  which 
some  have  held  to  be  solely  responsible  for  the  rise  of  these 

*  E.g.,  United  Five  and  Ten  Cent  Stores;   Burt  Olney  Canning  Co. 


30  THE  CAPITALIZATION  OF  GOODWILL 

corporations.  As  was  explained  before,  this  view  is  un- 
sound; sufficient  proof  of  this  contention  is  found  in  two 
facts:  (i)  this  motive  was  not  effective  in  the  earliest 
flotations;  (2)  in  very  few  cases  was  it  the  sole  inducement 
for  the  later  incorporations.  However,  in  practically  every 
industrial  corporation  there  was  some  withdrawal  of  capital, 
even  in  cases  in  which  expansion  of  business  or  liquidation 
of  indebtedness  was  the  motive  which  really  brought  about 
the  flotation.  Finally,  in  all  those  flotations  where  the  only 
financial  consideration  was  the  withdrawal  of  capital,  it 
was  either  the  banker's  initiative  or  the  psychological  effect 
of  other  flotations  on  the  minds  of  the  owners  that  was 
really  effective.  Examples  of  this  type  were  Woolworth, 
May,  Kresge,  Goodrich,  and  Rumely. 

The  withdrawal  of  capital  was  seldom  set  forth  in  the 
prospectus  as  one  of  the  reasons  for  the  sale  of  preferred 
stock.  It  may  have  been  assumed  that  the  investor  would 
understand  that  any  capital,  which  was  not  intended  for 
expansion  or  for  liquidation  of  indebtedness,  was  to  be 
withdrawn.  However,  it  is  more  likely  that  this  reticence 
was  due  to  the  belief  that  the  ordinary  investor  would 
not  have  approved  such  a  withdrawal.  He  would  have 
felt  that  the  owner  was  trying  to  withdraw  his  capital, 
and  yet  keep  control  of  the  business  that  was  being  financed 
by  the  money  of  other  people.  The  answers  which  com- 
panies like  Woolworth,  May,  and  Kresge,  could  have  given 
might  have  been  convincing;  yet  the  absence  of  any 
definite  avowal  of  this  purpose  in  most  prospectuses  is 
evidence  that  it  was  considered  advantageous  not  to  present 
it. 

The  second  motive  which  influenced  owners  to  incor- 
porate was  the  desire  to  obtain  working  capital  for  expan- 
sion. The  advantage  of  borrowing  from  the  public  when 
compared  with  borrowing  from  the  commercial  banks  was 
recognized  in  many  cases  as  very  considerable.  The  loan 
could  be  made  for  a  long  period,  and  the  company's  credit 
was  thereby  increased  at  the  bank.  Shortly  after  Rumely 
and  Goodrich  were  reincorporated  there  was  a  spread  of 


MOTIVES   OF  OWNERS  AND   BANKERS  3I 

flotations  in  the  agricultural  implement  and  the  rubber 
tire  industries.  This  may  have  been  suggested  by  the 
example  of  those  first  two  incorporations;  but  the  fact 
that  the  other  companies  needed  capital  for  expansion  in 
the  years  191 1  and  1912  is  important.^  Although  the 
general  need  for  expansion  in  those  years  was  not  the  sole 
explanation  of  the  interest  of  the  owners  in  these  flotations, 
it  is  reasonably  clear  that  this  motive  played  an  important 
part. 

This  motive  was  the  one  which  the  prospectuses  were 
most  willing  to  acknowledge.  Expansion  or  the  need  for 
capital,  throughout  the  history  of  corporation  finance, 
has  been  considered  a  justification  for  a  public  sale  of  stock. 
In  England,  although  an  issue  of  debentuires  in  the  original 
financing  of  a  company  might  have  been  questioned,  such 
an  issue  was  considered  quite  the  proper  method  of  obtain- 
ing capital  for  expansion  later  in  the  company's  history, 
and  preferable  to  making  a  call  on  the  original  stock  holders. 
Expansion  seemed  the  legitimate  criterion  of  a  successful 
business,  and  the  need  for  working  capital  was  one  which 
investors  were  expected  to  be  willing  to  satisfy.  In  some 
of  the  prospectuses  of  the  new  industrials,  the  alleged 
"working  capital  for  expansion"  was  really  intended  for 
the  liquidation  of  indebtedness.  Naturally,  this  liquidation 
of  indebtedness  increased  the  credit  of  the  company  at  the 
banks,  and  thus  established  the  possibility  of  expansion. 
It  is  a  question,  however,  whether  the  investor  who  believed 
that  his  money  was  to  be  used  for  expansion  would  have 
been  equally  satisfied  if  he  had  known  that  it  was  to  be 
used  for  the  payment  of  debts. 

The  fact  that  these  industrials  did  increase  rapidly  in  a 
time  of  business  expansion  gives  great  importance  to  the 
second  motive.  As  soon  as  the  country  had  recovered  from 
the  economic  prostration  attendant  upon  the  panic  of  1907, 
these  industrials  began  to  appear.  Again  when  it  was 
realized  that  the  European  War  would  mean  great  pros- 
perity for  the  United  States,  the  market  teemed  with  these 

3  See  below,  p.  84. 


32  THE  CAPITALIZATION  OF  GOODWILL 

industrial  issues.  Certainly  the  proceeds  of  much  of  the 
preferred  stock  that  was  sold  went  into  expansion,  the 
purchase  of  new  machinery,  etc.  And  it  is  just  as  true 
that  much  of  the  money  which  it  was  believed  would  be 
used  for  new  working  capital  was  employed  to  pay  off 
debts  which  were  the  result  of  rapid  expansion. 

The  third  motive,  the  liquidation  of  indebtedness,  is  one 
of  peculiar  interest.  It  might  seem  that  the  company  in 
issuing  preferred  stock  to  pay  off  existing  indebtedness  was 
borrowing  from  Peter  to  pay  Paul.  But,  although  seven 
per  cent  was  a  high  price,  the  terms  were  far  better  for  the 
borrower.  There  was  no  need  to  renew  the  notes  as  they 
fell  due;  and  small  investors  were  easier  to  manage  than  the 
bankers.  Furthermore,  bankers  as  stock  holders  were 
allies;  but  bankers  as  creditors  had  not  always  been  so 
friendly.  It  is  easy  to  see  how  this  motive  led  to  incorpora- 
tion. When  a  merchant  needed  a  sum  of  money  for  some 
debt  or  other,  he  approached  the  banker.  Goldman,  Sachs 
&  Co.  had  done  a  credit  business  of  this  kind  long  before  the 
rise  of  these  industrials.  The  banker  discussed  with  the 
owner  the  value  of  a  flotation  as  a  method  of  obtaining 
money.  This  was  an  important  motive  in  the  Sears 
Roebuck  incorporation.  In  some  cases  the  banker  used 
as  one  of  his  arguments,  when  trying  to  induce  an  owner  to 
incorporate,  the  possibility  of  converting  large  outstanding 
liabilities  into  a  preferred  issue.  Stern  Bros,  changed  a 
bond  issue  into  an  issue  of  preferred  stock;  but  it  was  for 
reasons  of  taxation  and  not  for  the  purpose  of  improving 
its  credit.  However,  in  the  J.  I.  Case  flotation  one  of  the 
reasons — and  perhaps  the  principal  one — for  the  preferred 
issue  was  the  cancellation  of  a  large  bonded  debt.  In  the 
Manhattan  Shirt  Co.,  the  Moline  Plow  Co.,  and  in  Henry 
Sonneborn  Co.,  this  motive  was  of  great  importance. 


CHAPTER   IV 
The  Method  of  Flotation 

In  most  studies  on  corporation  finance,  much  has  been 
made  of  the  technic  of  the  underwriting.  The  actual 
mechanism  of  the  new  flotations  and  the  modus  operandi 
of  the  creation  and  the  disposal  of  the  preferred  stocks  in 
the  new  industrials  was  not  particularly  complicated  and 
is  of  interest  merely  because  it  shows  the  way  in  which  the 
banker-promoter  received  his  remuneration.  The  sale  of 
the  business  to  a  newly  created  corporation,  which  has  been 
described  elsewhere,  was  a  comparatively  simple  process. 
A  corporation  was  formed  which  bought  the  old  business 
from  its  owners,  and  in  return  gave  them  the  issues  of 
preferred  and  common  stocks.  The  former  owners  were 
then  in  entire  possession  of  the  preferred  and  common 
stocks.  So  much  for  those  flotations  wherein  the  owners 
withdrew  their  capital.  In  those  cases  where  the  sale  of 
preferred  stock  was  partly  intended  to  obtain  money  for 
the  business,  there  was  another  possibility.  The  corpora- 
tion might  have  given  the  owners  the  entire  issue  of 
common  stock,  but  only  a  part  of  the  preferred  issue. 
The  part  which  the  new  company  retained  could  then  be 
used  to  procure  the  new  capital  necessary.  In  some  cases, 
however,  the  owners  received  all  the  stock;  but  after  they 
had  disposed  of  it,  they  returned  a  part  of  the  proceeds  from 
the  sale  of  this  stock  to  the  new  company  in  return  for  its 
note. 

It  was  with  the  holders  of  the  stock,  namely,  the  former 
owners  of  the  business,  that  the  banker-promoter  dealt. 
The  banker-promoter,  alone  in  most  cases,  or  with  one  or 
two  associates,  bought  the  entire  issue  of  preferred  stock. 
One  of  the  leading  banker-promoters  in  the  field  said: 
*' We  bought  for  our  own  account  and  at  our  own  risk  from 
3  33 


34  THE  CAPITALIZATION  OF  GOODWILL 

the  stock  holders  of  the  new  company  (not  from  the  com- 
pany) all  or  a  part  of  the  Preferred  Stock,  with  a  bonus  of 
Common  Stock."  So  far  no  underwriting  was  done,  and 
no  syndicate  organized.  In  this  respect,  the  purchase  of 
an  issue  of  seven  per  cent  industrial  preferred  stock  differed 
from  the  ordinary  procedure  in  the  case  of  a  large  bond  issue. 
After  the  promoter  banker  had  bought  the  preferred  stock 
issue,  he  organized  what  was  called  a  syndicate  to  effect 
the  actual  marketing  of  the  stock.  The  case  that  was 
simplest,  though  probably  somewhat  exceptional,  was  that 
of  Cluett  Peabody.  The  banker-promoter  telegraphed  to 
a  number  of  bankers  throughout  the  country — ^who  were 
the  usual  customers  for  such  preferred  stock — the  amount 
of  stock  which  was  allotted  to  them.  They  were  to  answer 
immediately  if  they  accepted  his  allotment,  and  to  send  a 
check  for  the  amount  the  same  day.  Furthermore,  they 
were  given  a  price  below  which  they  were  not  to  market 
the  stock.  If  any  one  of  them  had  not  taken  his  allotment, 
he  had  less  chance  of  being  included  in  the  next  offering. 

A  second  method  of  marketing  the  stock  was  the  one 
which  was  commonly  used  by  the  largest  and  most  success- 
ful promoter-bankers.  Such  a  banker  often  would  merely 
announce  in  the  market  that  he  had  purchased  an  issue  of 
stock,  and  customers  would  be  immediately  available. 
These  customer-bankers  were  allowed  to  subscribe  for  a 
definite  portion  of  the  issue.  In  these  cases  they  did  not 
pay  for  their  allotments  and  carry  off  their  stock.  They 
signed  their  names  as  underwriters  in  a  syndicate  agreement. 
Then  they  returned  to  their  offices  and  proceeded  to  sell 
the  stock  at  a  price  below  which  no  member  of  the  syndicate 
could  sell.  If  any  banker  did  not  sell  his  entire  allotment, 
he  was  nevertheless  liable  for  it  at  the  same  price.  Thus, 
his  entry  into  the  syndicate  agreement  amounted  to  an 
actual  purchase  of  the  stock.  In  many  cases  his  entry  into 
the  syndicate  implied  immediate  remittance  to  the  syndi- 
cate-manager (that  is,  the  banker-promoter)  of  the  entire 
amount  of  his  liability.  In  some  cases  this  payment  was 
deferred;    but  in  no  case  was  his  liability  different  from 


METHOD  OF  FLOTATION  35 

what  it  would  have  been  if  he  had  made  an  outright  purchase 
of  his  allotment. 

A  third  method  of  marketing  the  stock  was  by  letters 
to  bankers  throughout  the  country,  who  were  invited  to 
join  the  syndicate  and  participate  in  the  manner  described 
above.  There  was  nothing  very  complicated  about  these 
syndicates.  Perhaps  the  fundamental  idea  in  the  syndicate 
marketing  was  the  collective  buying  and  selling  in  order  to 
keep  a  standard  price  below  which  no  participant  could 
sell.  It  was  a  more  attractive  way  of  buying  from  the 
small  banker's  point  of  view,  because  in  many  cases  he 
did  not  have  to  pay  for  his  entire  allotment  until  after  he 
had  sold  his  stock  or  at  least  a  part  of  it.  However,  his 
liability  was  the  same  as  in  the  case  of  actual  purchase. 

This  syndicate  marketing  is  interesting  in  that  it  reveals 
the  way  in  which  the  banker-promoter  and  the  other  bankers 
received  their  remuneration.  The  promoter-banker  re- 
ceived from  the  owners  a  bonus  of  common  stock  with  the 
purchase  of  the  preferred.  When  he  organized  the  syndi- 
cate of  which  he  was  usually  a  member,  he  sometimes 
distributed  half  or  more  of  the  bonus  he  had  received 
among  the  participants  in  the  syndicate.  He  did  not  reveal 
the  price  which  he  had  paid  the  original  owners  for  the 
preferred  stock  nor  the  amount  of  the  common  stock 
bonus,  but  it  was  generally  understood  that  the  syndicate 
was  to  receive  the  preferred  stock  at  about  the  same  price 
that  he  paid  for  it  and  that  it  was  to  be  marketed  with  but 
a  point  or  so  of  profit.  In  return  for  marketing  the  stock, 
the  participants  received  common  stock  bonuses;  and  the 
banker-promoter  or  syndicate-manager  also  received  his 
remuneration  from  the  common  stock  he  withheld  from 
the  syndicate. 

The  participant  in  a  syndicate  sometimes  received  his 
remuneration  in  a  different  way.  He  bought  preferred  stock 
at  98  which  he  was  told  to  market  at  100,  and  common 
stock  at  32  which  he  was  told  to  sell  at  40.  Assuming  that 
the  amounts  of  preferred  and  common  were  equal  (a  con- 
venient though  improbable  assumption),  he  could  calculate 


36  THE  CAPITALIZATION  OF  GOODWILL 

a  profit  of  10  points  on  the  purchase  taken  as  a  whole. 
This  remuneration  to  him  seemed  no  different  in  kind  from 
the  profit  he  received  from  buying  bonds  at  95  and  selling 
them  at  100.  But,  theoretically,  there  was  a  difference. 
The  original  owners  of  the  preferred  stock  were  supposed 
to  receive  almost  all  the  market  would  give  for  such  stock. 
What  the  promoter-bankers  received  from  them  and  what 
the  syndicate  participants  were  given  was  a  common  stock 
bonus  and  not  a  difference  in  buying  and  selling  price. 
The  actual  amount  of  these  bonuses  and  the  remuneration 
received  by  the  banker-promoters  and  the  customer- 
bankers  is  hard  to  discover.  The  promoter-bankers  told 
their  correspondents  very  little,  and  the  information  on 
this  subjected  extended  by  them  was  meager. 


CHAPTER  V 
The  Principles  of  Capitalization 

The  development  of  industrial  corporations  which  repre- 
sent the  capitalization  of  goodwill  and  intangible  assets 
offers  some  new  problems  for  the  accountant  and  for  the 
economist.  It  is  particularly  interesting  to  the  economist 
to  determine  in  how  far  bankers  and  business  men  take 
heed  of  the  fundamental  laws  which  govern  interest  and 
profit  and  from  which  proper  principles  of  capitalization 
can  be  deduced. 

The  accountant  defines  capital  investment  as  the  fixed 
assets  and  current  assets,  which  are  needed  continuously  for 
the  operation  of  a  business.  He  distinguishes  carefully  the 
capital  which  is  invested  in  a  business  and  which  is  kept 
there  from  the  money  expended  by  the  business  for  ma- 
terials, labor,  and  other  items,  which  go  to  make  up  the 
costs  of  production.  The  distinctions  which  he  makes 
between  the  capital  account  (that  is,  the  investment)  and 
the  cost  account  (that  is,  the  costs  of  production)  are  not, 
however,  so  clearly  definable  as  he  seems  to  think.  The 
accountant  insists  that  investment  represents  the  amount 
of  money  actually  invested  and  not  any  market  or  other 
arbitrary  evaluation  put  on  the  properties. 

The  accountant  adds  the  sum  of  the  expenditures  for 
any  period  (namely,  the  cost  of  the  labor,  the  cost  of  the 
materials,  and  the  overhead  costs)  and  subtracts  this  sum 
from  the  value  of  the  sales  in  order  to  determine  what  he 
calls  profit.  As  no  interest  on  the  investment  is  included 
in  these  expenditures,  the  accountant's  profit  includes  what 
the  economist  regularly  defines  as  interest  and  profit.^ 
The  accountant  divides  his  profit  by  investment  in  order 
to  determine  the  return  on  the  investment  for  the  period. 

^  No  bond  interest  is  included  in  cost. 

37 


38  THE  CAPITALIZATION  OF  GOODWILL 

The  logical  implications  of  strict  accounting  reasoning 
might  seem  to  result  in  the  principle  that  the  capitalization 
should  be  identical  with  the  investment.  But  if  the  ac- 
countant insisted  upon  a  capitalization  not  in  excess  of 
investment  his  path  would  not  be  an  easy  one.  The 
captains  of  industry  often  desire  to  conceal  the  actual 
investment  and  often  feel  the  necessity  of  disguising  very 
large  returns.  Furthermore,  in  the  case  of  the  consolida- 
tion of  two  businesses  in  which  the  investment  might  be 
the  same  but  the  earnings  different,  it  would  be  obviously 
unfair  to  expect  the  stock  holders  of  the  two  corporations 
to  accept  the  same  amount  of  capital  stock.  Either  the 
differential  theory  of  interest  or  the  differential  theory  of 
profit  might  be  adduced  in  extenuation  of  a  capitalization 
larger  than  the  original  investment.  The  profits  earned 
by  the  entrepreneur  on  different  pieces  of  capital  goods  may 
be  different,  even  though  the  capital  invested  in  the  capital 
goods  be  the  same  in  amount.  Whether  these  differences 
represent  differences  in  interest  or  differences  in  profits  is 
a  technical  economic  problem  which  has  considerable 
interest.^ 

2  If  the  preferred  stock  holders  replace  the  investment  of  the  original 
owners,  the  preferred  stock  dividends  may  be  considered  interest. 
If  7  per  cent  bonds  had  been  issued  instead  of  preferred  stock  there 
would  have  been  little  difficulty  in  determining  the  economic  nature  of 
the  return.  The  high  rate  of  interest,  however,  seems  to  suggest  the 
possibility  that  there  is  some  profit  included  in  this  interest,  yet,  if  it 
be  assumed  that  profit  is  the  entrepreneur's  gain  and  presupposes 
actual  administrative  control  and  that  the  return  for  risk  is  a  capitalist's 
return,  the  preferred  dividend  would  be  considered  interest  and  its 
size  could  be  explained  by  the  risk  involved.  The  better  preferred 
stocks  are  marketed  in  many  cases  above  par,  so  that  the  interest  paid 
on  investment  is  not  always  7  per  cent  when  the  risk  is  not  so  great. 
The  earnings  on  the  common  stock,  then,  represent  pure  profit.  This 
analysis  is  based  on  Francis  Walker's  theory  of  profit,  and  practically 
assumes  the  inclusion  of  interest  in  cost  for  the  determination  of  pure 
profit. 

The  accountant,  who  includes  neither  bond  interest,  preferred 
dividends,  nor  estimated  interest  on  investment  in  cost,  seems  to 
assume  the  differential  theory  of  capital  as  the  basis  of  his  analysis. 
Different  pieces  of  capital  goods  are  operated  with  different  degrees  of 
efficiency  and  bring  different  returns, — and  by  returns  are  meant 
interest  plus  profit. 

The  distinction  between  interest  and  profit  has  been  less  carefully 
defined  by  economists  than  its  importance  merits.  If  profit  or  loss 
in  any  particular  case  can  be  thought  of  as  the  difference  between  cost 


PRINCIPLES  OF  CAPITALIZATION  39 

When  the  proceeds  from  the  sale  of  the  preferred  stock 
are  used  to  replace  the  investment  of  the  original  owners, 
the  preferred  stock  theoretically  should  represent  approxi- 
mately the  original  investment,  and  the  common  stock 
would  then  represent  the  entrepreneur's  claim  on  pure 
profits.  If  the  entrepreneurs  hold  all  the  common  stock, 
it  makes  no  difference  into  how  many  shares  the  common 
stock  is  divided.  If  they  sell  all  or  a  part  of  it,  the  prob- 
lem is  not  so  simple.  Those  who  buy  common  stock  in  the 
stock  market  are  ordinarily  not  entrepreneurs;  although 
they  have  legal  title  to  a  part  of  the  capital  goods  and  to 
the  product,  they  have  no  administrative  control.  They 
invest  capital  in  the  business,  and  receive  a  less  certain 
return  because  of  the  claims  of  the  preferred  stock  holders. 
Thus,  they  perform  the  capitalist's  rather  than  the  entre- 
preneur's function  and  receive  technically  the  entrepreneur's 
return  or  a  part  of  it. 

From  the  point  of  view  of  the  practical  business  man, 
the  preferred  stock  represents  assets  and  the  common  stock 

and  selling  price,  interest  must  be  included  in  cost.  The  accountant 
includes  only  actual  expenditures  in  cost,  and  for  the  entrepreneur  who 
owns  his  investment,  interest  is  not  an  actual  expenditure.  But 
when  the  entrepreneur,  i.e.,  the  common  stock  holders,  does  not  own  the 
investment,  the  7  per  cent  dividend  payable  to  the  preferred  stock- 
holders, i.e.,  the  capitalists,  is  clearly  an  actual  expenditure  and  a  cost. 
Capital  goods,  the  accountant  maintains,  do  not  always  yield  enough 
to  cover  the  expenditures  of  the  company  and  its  preferred  stock 
dividends:  obviously  in  such  cases  there  are  no  profits;  there  may  even 
be  losses.  Wage  earners  do  not  always  earn  their  wages;  yet,  the 
accountant  includes  in  cost  the  actual  amounts  paid  in  wages.  Wages 
must  be  paid  or  laborers  will  not  work.  If  wages  are  larger  than  the 
product  produced  by  the  laborers,  the  profits  of  the  entrepreneur  are 
reduced,  but  the  interest  on  the  capital  should  certainly  not  be  affected. 
If  capital  is  not  well  invested  in  captal  goods,  the  return  imputable  to 
such  capital  goods  is  less  than  the  amount  which  must  be  allowed  for 
the  use  of  capital.  The  entrepreneur's  profit  is,  then,  reduced  by  that 
amount.  Capital  goods  do  not  earn  returns,  as  is  popularly  main- 
tained: the  entrepreneur  with  his  capital  investment,  his  labor,  his 
land,  etc.,  does  the  earning.  But  whether  the  capital  is  well  invested 
or  poorly  invested  in  capital  goods,  as  capital  its  return  must  be  con- 
sidered before  profit  can  be  determined.  The  chief  difficulty  of  the 
accountant  lies  in  the  necessity  of  estimating  the  interest  on  investment 
to  be  included  in  cost.  However,  when  the  7  per  cent  dividend  is 
actually  paid  or  payable,  as  in  the  industrial  corporations  represented 
in  this  study,  these  dividends  should  be  considered  as  interest  and 
included  in  the  cost  to  be  deducted  from  the  value  of  the  sales  for  the 
determination  of  profit. 


40  THE  CAPITALIZATION  OF  GOODWILL 

is  explained  in  either  two  ways,  by  the  intangible  values  or 
goodwill  and  by  the  earning  power  in  excess  of  the  preferred 
stock  requirements. 

It  is  interesting  to  consider  the  opinions  of  the  bankers 
who  have  been  most  active  in  the  flotations  of  these  com- 
panies. There  seems  to  be  general  agreement  that  no 
matter  what  the  earnings  of  a  business  were  at  the  time  of 
incorporation,  the  preferred  stock  had  to  be  covered  by  the 
tangible  assets.  And  with  but  one  or  two  exceptions,  this 
seems  to  have  been  the  case.  The  most  prominent,  per- 
haps, of  the  banker-promoters  asserted  that  the  value  of 
the  tangible  assets  had  to  be  two  or  three  times  as  great 
as  the  issue  of  preferred.  As  a  matter  of  fact,  in  two-thirds 
of  his  companies  the  preferred  was  just  about  equal  to  the 
tangible  assets,  and  in  the  other  third  the  margin  above 
this  was  very  slight.  Another  banker  thought  that  the 
amount  of  preferred  stock  should  have  been  about  one  half 
of  the  tangible  assets  at  the  time  of  incorporation.  All  of 
these  estimates  were  too  conservative.  The  preferred  stock 
was  in  practically  every  case  covered  by  the  tangible 
assets,  but  not  by  such  a  margin  as  these  men  supposed. 
The  question  of  common  stock  issues  is  a  more  difficult  one. 
If  the  owners  intended  to  hold  the  common  stock,  the 
arnount  of  it  did  not  concern  them  particularly.  If  the 
common  stock  was  to  be  marketed  immediately  after  in- 
corporation, the  owners  would  in  all  probability  have  de- 
sired as  large  an  issue  as  possible.  Certain  bankers  esti- 
mated that  the  earnings  on  the  common  stock  after  the 
payment  of  the  preferred  dividends  were,  on  the  average, 
five  or  six  per  cent.  As  a  matter  of  fact,  the  average  was 
considerably  higher.  The  reason  for  this  will  be  considered 
later. 

The  opinions  of  the  bankers  are  interesting  in  that  they 
show  that  there  was  no  one  principle  of  capitalization  which 
explained  both  preferred  and  common  stock  and  that  a 
different  theory  explained  the  preferred  stock  from  that 
which  explained  the  common.  The  preferred  stock  was 
limited  by  the  tangible  assets;   the  common  stock  had  its 


PRINCIPLES  OF  CAPITALIZATION  ,  4I 

justification  in  the  earning  power.  True,  the  preferred 
dividends  had  to  be  covered  by  the  earnings:  so  seldom, 
however,  did  an  issue  of  preferred  stock  appear,  the  divi- 
dends of  which  were  not  easily  covered  by  the  profits, 
that  the  bankers  seldom  thought  of  the  preferred  stock  in 
its  relation  to  the  earnings.  Sometimes  a  prospectus  would 
announce  the  ratio  of  the  earnings  to  the  preferred  dividend 
obligations,  but  this  was  clearly  not  a  significant  feature 
and  was  adduced  more  in  the  nature  of  additional  evidence 
for  convincing  the  investor  of  the  safety  of  the  preferred. 
An  issue  of  preferred  stock  was  usually  thought  of  as  an 
issue  of  obligations;  important  similarities  to  bonds  will 
be  indicated  in  another  place.  As  much  as  the  bankers 
say  about  the  intangible  values  or  good  will  that  were 
behind  the  common  stock,  they  realized  that  it  wac  the 
earning  power  that  was  the  real  justification.  The  fact 
that  the  corporation  earned  more  or  was  expected  to  earn 
more  than  enough  to  pay  the  dividends  on  the  preferred 
stock  gave  value  to  the  common  stock. 

Evidently  there  are  two  things  which  are  of  importance 
in  the  capitalization  of  these  industrials:  first,  the  ratio  of 
tangible  assets  to  the  preferred  stock  at  the  time  of  in- 
corporation; second,  the  earnings  on  the  common  stock. 

The  amount  of  preferred  stock  issued  at  the  time  of 
incorporation  is  shown  in  the  first  column  of  the  table  on 
page  44.  In  the  second  column  is  the  ratio  of  the  tangible 
assets  to  the  preferred  stock.  By  tangible  assets  are  meant 
capital  stock  and  surplus  with  goodwill  deducted,  as  they 
appeared  on  the  first  balance  sheet.  This  amounted  to 
the  same  thing  as  the  tangible  assets  with  the  bonds,  notes, 
and  current  liabilities  deducted.  Very  often,  as  it  Was 
explained  earlier,  a  part  of  the  proceeds  from  the  sale  of  the 
preferred  stock  was  returned  to  the  corporation  for  working 
capital.  This  addition  would  naturally  be  included  in  the 
tangible  assets.  Furthermore,  when  the  outstanding  lia- 
bilities of  the  business  were  liquidated  by  the  sale  of  the 
preferred  stock,  the  tangible  assets  appeared  that  much 
greater  because  of  the  decrease  in  the  amount  deducted  for 


42  THE  CAPITALIZATION  OF  GOODWILL 

liabilities.  If  the  preferred  stock  was  equal  to  the  tangible 
assets,  this  ratio  was  unity.  If  the  preferred  stock  was 
one  half  or  one  third  of  the  tangible  assets,  this  ratio  was 
two  or  three.  Thus,'  the  larger  this  ratio,  the  more  con- 
servative was  the  issue  of  preferred. 

In  the  third  column  is  the  amount  of  common  stock 
issued.  In  the  fourth  column  are  the  earnings  (after  the 
deduction  of  the  preferred  dividends)  on  the  common  stock. 
Although  the  companies  were  just  starting  their  corporate 
lives,  there  was  naturally  a  record  of  yearly  earnings  for 
the  private  businesses  which  preceded  them.  If  these  earn- 
ings had  showed  any  regular  increases  or  decreases,  the 
probable  earnings  for  the  first  year  of  the  corporation  might 
have  been  estimated.  As  a  matter  of  fact,  these  pre-incor- 
poration  profits  were  in  most  every  case  so  irregular  and 
fluctuating  that  some  more  arbitrary  method  of  calculating 
the  probable  earnings  has  had  to  be  adopted.  The  earnings 
of  the  three,  four,  or  five  years  preceding  incorporation 
were  usually  given  when  a  flotation  was  advertised.  An 
average  of  these  three,  four,  or  five  years  has  been  calcu- 
lated. As  most  of  these  businesses  increased  their  earnings 
from  year  to  year,  this  average  seemed  in  many  cases  too 
low  an  estimate  of  the  corporation's  probable  success. 
Therefore,  it  seemed  best  to  take  an  average  of  this  average 
and  of  the  profits  for  the  last  year.  The  figures  in  column  4 
have  been  obtained  in  this  way.  This  method  was  desirable 
because  it  gave  a  larger  prominence  to  the  profits  of  the 
year  immediately  preceding  incorporation.  In  most  cases, 
when  a  prospectus  gave  profits,  it  meant  profits  after  the 
deduction  of  interest  charges.  When  a  business  paid  its 
debts  by  the  sale  of  the  preferred  stock,  its  profits  after 
incorporation  showed  an  increase,  other  things  being  equal, 
merely  because  the  interest  charges  were  decreased  or  done 
away  with  and  because  the  preferred  dividends  were  not 
deducted  from  net  profits.  Furthermore,  the  new  working 
capital  would  in  all  probability  have  increased  future  earn- 
ings. However,  a  business  that  was  incorporated  merely 
to  enable   the   owners   to  withdraw   their  capital   could 


PRINCIPLES  OF  CAPITALIZATION  43 

anticipate  as  great  an  increase  in  profits  as  the  other  types 
because  it  was  most  Hkely  a  better  business  in  that  it  had 
been  built  up  slowly  and  had  no  large  debts,  and  no  need  of 
new  working  capital. 

The  table  on  the  following  pages  shows  the  capitalization 
of  forty-six  industrial  corporations.^ 

When  the  large  number  of  private  businesses  that  were 
incorporated  is  considered,  this  material  may  seem  meager. 
Many  private  businesses  were  incorporated,  however,  be- 
cause of  the  legal  disadvantages  inherent  in  a  partnership. 
Many  of  them  were  closed  corporations,  that  is,  they  had 
no  securities  in  the  open  market.  Some  merely  issued 
common  stock  and  were  capitalized  in  a  different,  and  in  a 
less  elaborate,  way  than  those  discussed  here.  Some  were 
quoted  on  the  smaller  exchanges  and  were  not  so  well 
known;  the  necessary  data  concerning  these  companies 
was  usually  not  available.  Of  the  forty-six  corporations 
given,  twenty-four  were  listed  on  the  New  York  Stock 
Exchange  and  seven  were  traded  in  on  the  Curb ;  practically 
all  of  the  others  were  listed  on  the  smaller  exchanges. 
Many  of  the  industrials  quoted  on  the  exchanges,  and  even 
a  number  of  those  which  had  preferred  stock,  were  very 
different  from  the  type  dealt  with  here.  The  trusts  and 
the  combinations  did  not  ordinarily  issue  stock  only  for 
sale  in  the  market.  The  stock  of  these  companies  was 
usually  issued  in  part  to  the  different  owners  in  pajmient 
for  the  businesses  which  they  surrendered  to  the  trust  or 
to  the  combination. 

Of  the  industrials  in  the  table,  five  produced  rubber 
goods  and  rubber  tires."*  There  were  four  automobile  com- 
panies.'* There  were  six  which  made  agricultural  imple- 
ments.* There  wer€  four  chains  of  five  and  ten  cent  stores, 
and  two  department  stores.'*  There  was  one  canning  com- 
pany and  one  can  making  company,  and  three  which  manu- 
factured and  sold  articles  of  food  consumption.  There 
were  twelve  which  produced  or  sold  articles  of  clothing. 

'  From  original  prospectuses  issued  by  the  promoter-bankers  and 
from  Poor's  and  Moody's  Manuals  of  Industrials. 
*  See  appendices  i,  ii,  iii,  and  iv. 


44 


THE  CAPITALIZATION  OF  GOODWILL 


Probable 
Per  Cent 

Ratio  of 
Tangible 
Assets  to 
Preferred 
Stocks 

Earned  on 
the  Common 

Name  of  Corporation 

Preferred  Stock 

Common  Stock 

Stock  (After 
Deducting 
Preferred 
Dividends 

from  Net 

Profit) 

B.  F.  Goodrich 

$30,000,000 

113 

$60,000,000 

8.3 

Goodyear 

5,000,000 
3,000,000 
2,000,000 

2.00 

5,000,000 
8,000,000 

22.8 

Fisk 

1st 

1. 00 

5.2 

2d 

Kelly-Springfield . . . 

1st 

2d 

3,758,000 
907,000 

1.24 

4,000,000 

23-5 

Ajax-Grieb 

330,000 

3.71 

450,000 

340 

Studebaker 

13*500,000 

1.77 

30,000,000 

4-5 

Willys-Overland. . .  . 

5,000,000 

2.16 

20,000,000 

12.5 

Maxwell 

1st 

13,000,000 
11,000,000 

13,000,000 

0.0 

2d 

1.04 

Hupp 

1,500,000 

1.73 

5,000,000 

9.0 

Emerson- Branting- 

ham 

12,000,000 
37,800,000 

1-45 
1. 18 

10,000,000 

7.0 

7-5 

Deere 

18,400,000 

Cased.  I.) 

12,000,000 

1.66 

8,000,000 

5.7 

Moline  Plow 

1st 

7,500,000 

9,000,000 

2d 

1,500,000 

2.04 

9,000,000 

II.O 

M.  Rumely 

8,000,000 

2.32 

9,000,000 

6.3 

Hart-Parr 

750,000 
15,000,000 

2.44 
1. 00 

1,000,000 

24.5 
6.8 

F.W.  Wool  worth... 

50,000,000 

S.  S.  Kresge 

2,000,000 

1.23 

1,000,000 

3-3 

S.  H.  Kress 

4,000,000 

1. 10 

12,000,000 

6.6 

McCrory 

1,250,000 
5,000,000 

1.60 

5,000,000 
15,000,000 

4-3 
5-9 

May  Dept.  Stores.  . 

1. 00 

Kaufman  Dept. 

Stores 

2,500,000 

1. 00 

7,500,000 

8.0 

Hart    Schaffner    & 

Marx 

5,000,000 
750,000 

1. 00 

15,000,000 
2,500,000 

3.9 

Sonneborn 

1st 

2d 

1,000,000 

1. 14 

6.7 

A.  B.  Kirschbaum.  . 

1,350,000 

1.48 

2,650,000 

5.0 

Frisbie  Stansfield..  . 

1,300,000 

115 

1,500,000 

3-0 

Barnhart    Bros.    & 

Spindler 

1st 

1,250,000 

1,000,000 

2d 

750,000 

1. 00 

1.3 

Pierce,    Butler    & 

Pierce 

1st 

700,000 
150,000 

1. 17 

800,000 

4.3 

2d 

^  0 

International  Shoe  . 

8,250,000 

1. 00 

12,750,000 

6.9 

McElwain  Shoe .... 

1st 

2,500,000 

1,500,000 

2d 

1,000,000 

143 

30.0 

Brown  Shoe 

4,000,000 

2.50 

6,000,000 

5-0 

Julius  Kayser 

1st 

3,000,000 

6,000,000 

9.3 

2d 

695,000 

1.26 

Cluett  Peabody .... 

8,000,000 

1. 00 

18,000,000 

8.2 

Manhattan  Shirt .  .  . 

3,000,000 

1. 00 

5,000,000 

5.6 

PRINCIPLES  OF  CAPITALIZATION 


45 


Probable 
Per  Cent 

Ratio  of 

Earned  on 

Name  of  Corporation 

Preferred  Stock 

Tangible 
Assets  to 

Common  Stock 

the  Common 
Stock  (After 

Preferred 

Deducting 

Stocks 

Preferred 
Dividends 
from  Net 

Profits) 

Acme  Tea 

1st 

2,750,000 
500,000 

3,500,000 

2d 

1. 00 

12. 1 

Jewel  Tea 

4,000,000 
5,000,000 

.99 

12,000,000 
8,000,000 

II. I 

Loose-Wiles 

1st 

2d 

2,000,000 

1. 00 

00.0 

Continental  Can .  .  . 

5,500,000 

8,000,000 

5,500,000 

1. 00 

5-0 

Armsby  Co.  of  N.  Y. 

500,000 

2.00 

420,000 

26.9 

Sears  Roebuck 

10,000,000 

1. 00 

30,000,000 

5.8 

National    Cloak    & 

Suit          

5,000,000 
6,000,000 

I  00 

12,000,000 
9,300,000 

8.0 

12.9 

Griffin  Wheel 

I.4I 

Kelsey  Wheel 

3,000,000 

1. 00 

10,000,000 

7.5 

Pettibone  Mulliken. 

1st 

2,250,000 

7,000,000 

2d 

750,000 

.82 

5.6 

Burns  Bros 

2,000,000 

1.25 

5,500,000 

6.3 

Owens  Bottle  Ma- 

chine   

7,000,000 

1.92 

9,000,000 

27.5 

Underwood     Type- 

writer   

5,000,000 

1. 00 

8,500,000 

4-5 

There  were  two  mail-order  houses,  two  wheel  manufacturing 
companies,  and  four  miscellaneous  companies. 

The  ratios  of  the  tangible  assets  to  the  preferred  issues 
furnish  the  basis  for  some  reasonably  satisfactory  generaliza- 
tions. The  average  of  the  figures  in  the  second  column  is 
about  1.39.  In  other  words,  the  amount  of  preferred  stock 
issued  by  the  companies,  studied  in  the  table,  was  roughly 
seven-tenths  of  the  tangible  assets.  In  more  than  one- 
third  of  the  cases  recorded  the  preferred  stock  was  about 
equal  to  the  tangible  assets.  The  fact  that  the  average  is 
as  high  as  it  is  can  be  explained  by  several  causes;  first, 
earlier  in  the  history  of  these  industrials  when  preferred 
stock  of  this  kind  was  not  so  well  known,  some  of  the  issues 
were  more  conservative;  second,  the  smaller  companies, 
which  were  comparatively  less  stable,  had  to  be  more 
careful  in  their  financing;  third,  industrials  like  the  agri- 
cultural implement  companies,  the  earnings  of  which  seemed 
likely   to   be   subject   to   great  fluctuations,   were  wisely 


46  THE  CAPITALIZATION  OF  GOODWILL 

somewhat  conservative  in  their  preferred  issues.  All  these 
factors  tended  to  make  the  average  for  this  table  higher 
than  the  figure  which  represented  the  usual  practice,  that 
is,  the  practice  which  obtained  in  the  largest  number  of 
flotations. 

The  average  of  the  percentages  earned  on  the  common 
stock  of  these  companies  was  9.7;  yet  in  most  cases  the 
percentage  lies  somewhere  between  5  per  cent  and  7  per  cent. 
Here,  too,  the  usual  percentage  was  considerably  lower 
than  the  average  for  this  table.  This  disparity  is  due  to  the 
large  percentages  earned  by  the  common  stocks  of  the 
smaller  industrials.  All  those  companies  which  earned 
more  than  twenty  per  cent  on  their  common  stock,  with 
the  exception  of  Goodyear,  were  small  and  not  so  well 
known,  for  example,  Armsby,  Owens  Bottle  Machine, 
Kelly-Springfield  Tires,  Ajax  Rubber  &  Tire,  Hart-Parr, 
and  McElwain  Shoe.  The  per  cent  earned  by  the  common 
stock  of  the  better  known  industrials  is  surprisingly  low. 
Sears  Roebuck,  Underwood  Typewriter,  Continental  Can, 
Studebaker,  Brown  Shoe,  F.  W.  Woolworth,  Manhattan 
Shirt,  and  Hart,  Schaffner  and  Marx,  started  with  common 
stock  issues  which  were  very  large  when  compared  to  their 
past  earnings.  The  first  six  of  the  eight  industrials  men- 
tioned were  the  work  of  the  bankers,  Goldman,  Sachs  &  Co. 
The  common  stocks  bought  out  by  these  bankers  are 
usually  listed  and  traded  in  on  the  New  York  Stock  Ex- 
change immediately  after  the  incorporation.  This  would 
seem  to  indicate  that  some  of  the  most  important  of  the 
common  stock  issues — those  which  were  released  by  the 
owners  and  sold  to  the  public — have  been  the  least  con- 
servatively capitalized.  True,  these  companies  had  been 
enormously  successful  as  private  businesses  and  anticipated 
futures  which  seemed  to  justify  large  issues  of  common 
stock. 

There  is  one  important  question  as  to  the  difference 
between  those  common  stocks  which  were  held  by  the 
owners  and  those  which  were  sold  in  the  market.  When  a 
private  business  was  incorporated  or  when  a  closed  corpora- 


PRINCIPLES  OF  CAPITALIZATION  47 

tion  was  reincorporated  so  that  the  preferred  stock  could 
be  sold,  the  control  of  the  common  stock,  theoretically, 
was  held  by  the  owners.^  The  common  stock  with  its 
voting  power  was  the  means  by  which  they  controlled 
the  business.  Apparently  one,  of  the  most  useful  arguments 
employed  by  the  bankers  who  were  trying  to  persuade  a 
large  merchant  to  incorporate  was  that  by  so  doing  the 
intangible  values,  or  goodwill,  and  the  surplus  earning 
power  could,  thus,  be  capitalized  and  sold.  If  at  the  death 
of  one  of  the  two  partners,  who  owned  a  business  with 
tangible  assets  values  at  $2,000,000,  but  with  yearly  earn- 
ings of  about  $400,000,  and  if  the  widow  of  the  deceased 
were  paid  off  by  the  surviving  partner  with  $1,000,000, 
she  could  count  on  an  income  of  $60,000  at  best,  whereas 
before  her  husband's  death  their  income  had  been  $200,000. 
If  these  partners  had  been  incorporated  they  could  have  sold 
$2,000,000  worth  of  preferred  stock;  each  one  might  have 
withdrawn  his  million  and,  yet,  with  $4,000,000  worth  of 
common  stock  they  would  have  controlled  the  business  and 
its  surplus  earnings.  At  the  death  of  one  of  the  partners  the 
widow  would  receive  $2,000,000  worth  of  common  stock 
besides  the  $1,000,000  withdrawn  by  her  husband  when  he 
sold  the  preferred.  The  banker  explained  further  that  there 
was  a  method  by  which  this  widow  could  be  put  in  a  position 
to  dispose  of  her  common  stock  if  at  any  time  she  so  desired. 
All  that  the  owner  had  to  do  was  to  give  the  banker  a  large 
enough  slice  of  the  common  issue  so  that  he  could  put  it 
on  the  market  and,  thus,  advertise  it.  Then,  at  any  time, 
the  large  holder  of  the  common  stock  could  unload.  How- 
ever, the  careful  banker  tried  to  keep  the  owner  from  selling 
his  common  until  he  reached  the  age  of  retirement.  It  was 
to  the  interest  of  all  that  the  men  who  had  been  responsible 
for  the  success  of  the  business  should  hold  the  reins  as  long 
as  possible. 

There  is  a  well-marked  difference  between  those  common 
stock  issues  which  were  to  be  held  by  the  owners  and  those 

*  Jones  Bros.  Tea  Company  sold  the  common  stock  and  held  the 
preferred  stock,  but  this  was  exceptional. 


4^  THE   CAPITALIZATION   OF   GOODWILL 

which  were  to  be  sold  in  the  market.  Obviously  it  made 
very  little  difference  to  the  owner  whether  the  common 
stock  was  divided  into  a  million  or  into  four  million  parts, 
provided  he  held  it  all.  Thus,  companies  like  Kelley- 
Springfield  (the  early  issue),  Ajax-Grieb,  Hart- Parr,  Mc- 
Elwain  Shoe,  Armsby  Co.,  and  Owens  Bottle  Machine 
earned  between  twenty  and  thirty  per  cent  on  the  common 
stock.  Even  where  common  stock  was  marketed,  small 
companies  like  those  mentioned  were  obliged  to  offer 
especial  inducements  because  of  the  advantages  of  larger, 
more  stable,  and  better  advertised  companies.  The  reason 
why  the  larger  and  the  better  known  industrials  showed 
such  small  earnings  on  the  common  at  the  time  of  incorpora- 
tion is  explained  paradoxically  enough  by  the  difficulty  of 
selling  industrial  common  stocks  at  a  high  price.  It  was 
difficult  to  market  at  par  what  most  people  usually  con- 
sidered water.  The  larger  the  amount,  the  lower  was  the 
price  that  could  be  put  upon  it.  But  it  was  not  an  imme- 
diate market  which  was  anticipated.  The  owners  hoped 
for  large  earnings  in  the  future  and  they  desired  to  be  in  a 
position  to  sell  the  rights  to  these  earnings — in  the  form  of 
common  stock — to  the  best  advantage. 

There  are  corporations  represented  in  the  table  that 
earned  nothing  on  their  common  stock.  The  amount 
necessary  to  pay  the  preferred  dividends  completely  covered 
the  probable  earnings.  Two  such  companies  were  the 
Maxwell  Motor  Co.  and  the  Loose  Wiles  Biscuit  Co.  A 
very  interesting  fact  is  that  both  of  these  companies  had 
second  preferred  stock.  A  natural  deduction  would  be 
that  the  owners  of  those  compaines,  which  earned  nothing 
on  the  common  stock,  took  the  second  preferred  stock  so  as 
to  assure  themselves  a  dividend.  There  are  twelve  com- 
panies in  the  table  which  have  second  preferred  stock: 
two  show  no  earnings  on  the  common  stock ;  one  shows  only 
1.3  per  cent;  and  four  show  very  low  percentages.  How- 
ever, three  or  four  show  earnings  considerably  above  the 
average.  It  is  worthy  of  mention  that  five  of  the  twelve 
companies  noted  were  sponsored  by  William  Salomon  &  Co., 
a  firm  which  seems  partial  to  second  preferred  stocks. 


PRINCIPLES  OF  CAPITALIZATION  49 

Some  important  facts  emerge  when  these  industrials  are 
divided  into  classes  according  to  the  kinds  of  business 
which  they  transacted.  It  is  found  that  the  corporations 
which  had  the  highest  ratios  of  tangible  assets  to  the  respec- 
tive preferred  issues  are  the  agricultural  implement  com- 
panies, the  rubber  and  tire  companies,  and  the  automobile 
companies.  The  average  ratio  for  the  agricultural  imple- 
ment companies  was  1.85.  When  compared  with  the 
general  average  1.39,  this  seems  remarkably  high.  There 
are  two  possible  explanations  for  the  high  ratio  in  the  case 
of  the  agricultural  implement  companies.  The  agricultural 
implement  stocks  were  brought  out  in  191 1  and  1912  when 
these  new  industrials  were  just  coming  into  prominence. 
Furthermore,  this  type  of  business  seemed  obliged  to  under- 
go great  fluctuations  in  profits  from  year  to  year.®  In  all 
but  one  of  these  companies,  however,  the  amount  authorized 
was  considerably  higher  than  the  amount  issued.  If  the 
authorized  preferred  stock  had  been  used  to  calculate  this 
ratio  it  would  have  averaged  1.21  instead  of  1.85.  Another 
explanation  of  the  high  ratios  applicable  to  all  three  indus- 
tries is  based  on  the  fact  that  they  all  had  large  plants  and 
expensive  machinery.'^  This  was  not  true  of  the  depart- 
ment stores  and  the  other  manufacturing  businesses.^  The 
ratio  of  the  preferred  stock  to  the  earnings  may  have  been 
very  much  the  same,  but  in  these  three  kinds  of  companies 
the  greater  value  of  the  tangible  assets  seems  to  explain 
the  high  ratios  shown. 

Studebaker  was  put  out  with  a  very  conservative  pre- 
ferred issue.  The  ratio  in  this  case  was  1.77.  After  the 
explanations  of  the  high  ratios  in  the  table,  it  is  interesting 
to  consider  the  facts  in  the  case  of  Studebaker.  When 
Studebaker  was  incorporated,  the  automobile  business  was 
not  as  highly  developed  as  it  is  today.  The  bankers  did 
not  know  at  that  time  whether  the  automobile  was  merely 
a  fad  or  whether  the  business  was  to  develop  stability.  For 
this  reason  they  were  probably  cautious.     If  the  business 

*  See  appendix  i. 

'  See  appendices  i,  ii,  iii. 

*  See  appendix  iv. 

4 


50  THE  CAPITALIZATION  OF  GOODWILL 

had  failed  to  develop,  the  real  estate,  buildings,  machinery, 
and  equipment,  amounting  to  almost  $10,000,000,  would 
have  been  worth  very  little.  The  preferred  issued,  there- 
fore, was  covered  by  the  inventories,  which  amounted  to 
more  than  $14,500,000,  and  the  amount  authorized  was 
very  little  more. 

Generally  considered,  the  earnings  on  the  common  stock 
of  the  agricultural  implement  companies  and  of  the  rubber 
and  tire  companies  were  high,  whereas  the  earnings  for  the 
automobile  companies  were  below  the  average.  Inasmuch 
as  the  preferred  issues  of  these  companies  were  small  when 
compared  to  the  tangible  assets,  it  is  natural  to  ask  whether 
the  issues  of  common  were  correspondingly  small  when 
compared  to  the  earnings.  In  other  words,  the  possible 
relation  of  the  figures  in  column  2  with  those  in  column  4  is 
suggested.  Was  a  conservatively  issued  preferred  stock 
likely  to  be  accompanied  by  a  conservative  issue  of  common  ? 
It  is  natural  that  there  should  be  a  certain  relation  between 
the  figures  in  the  second  and  fourth  columns  inasmuch  as 
in  both  cases  they  are  affected  by  the  amount  of  preferred 
stock.  If  this  amount  is  small  not  only  will  the  ratio  of 
tangible  assets  to  the  preferred  be  comparatively  high, 
but  the  earnings  on  the  common  will  be  larger  because  of 
the  smaller  deduction  necessary  for  the  preferred  dividends. 
An  estimate  of  this  relation  in  mathematical  terms  seems 
to  show  that  the  ratios  in  the  two  columns  are  not  so 
closely  related  as  one  might  expect.  Furthermore,  it  is 
evident  that  there  is  a  greater  dispersion  for  the  percentages 
in  the  fourth  column  than  for  the  ratios  in  the  second. 
Preferred  stock  issues  in  relation  to  tangible  assets  varied 
much  less  than  common  stock  issues  in  their  relations  to 
earning  power. 

The  principles  deducible  from  the  data  given  in  the  table, 
important  as  they  are,  do  not  furnish  material  sufficient 
to  construct  any  complete  theory  of  capitalization.  They 
are  valuable  as  evidence  and  as  proof  of  a  theory  which 
anyone,  who  is  familiar  with  these  industrials,  might  have 
evolved.     The  amount  of  preferred  stock  issued  was,  to 


PRINCIPLES  OF  CAPITALIZATION  5 1 

some  extent,  dependent  upon  the  particular  reason  for  the 
flotation.  If  the  owners  wanted  to  withdraw  a  certain 
sum  and  felt  that  it  was  best  to  pay  off  a  part  of  the  in- 
debtedness at  the  same  time,  the  size  of  the  preferred  issue 
was  influenced  by  these  desires.  True,  the  preferred  issued 
was  seldom  more  than  the  tangible  assets;  yet,  how  much 
less  it  was,  was  determined  by  the  purposes  of  the  owners. 
The  period  in  which  the  stock  was  floated,  the  condition 
of  the  market  at  the  time,  and  other  factors  determined  the 
capitalization  rather  than  any  abstract  principle.  When 
a  business  had  large  tangible  assets  or  when  there  was  some 
particular  need  for  caution,  the  bankers  probably  insisted 
upon  an  abnormally  conservative  ratio  of  tangible  assets  to 
preferred  stock.  In  short,  the  size  of  a  preferred  stock 
issue  was  determined  chiefly  by  the  amount  of  money 
which  the  managers  of  the  flotation  could  obtain  with 
safety  from  the  public  at  the  time.  The  reason  why  in 
such  a  great  number  of  cases  the  preferred  issue  was  equal 
or  almost  equal  to  the  tangible  assets  is  explained  by  the 
desire  of  the  owners  to  obtain  as  much  money  as  possible. 
When  there  was  an  abnormally  small  amount  of  preferred, 
the  issue  seems  to  have  been  merely  a  more  convenient 
method  of  obtaining  money  than  that  of  borrowing  from 
the  banks  or  selling  bonds.  The  amount  of  preferred  stock 
may  at  times  have  had  less  direct  relation  to  the  value  of 
the  assets  or  to  the  earning  power  of  a  business  than  it  had 
to  the  specific  needs  which  prompted  the  incorporation. 

Some  of  these  companies  showed  earning  on  the  common 
stock  (see  page  44,  column  4,)  as  low  as  nothing  and  others 
as  high  as  thirty  per  cent.  Those  common  stocks  which 
showed  no  earnings  represented  mere  anticipations  of  future 
profits.  Those  which  earned  abnormally  high  percentages 
were  usually  held  closely,  and  were  not  sold  in  the  market. 
They  were  associated  with  small  preferred  issues;  these 
flotations  were,  as  it  was  explained  before,  merely  methods 
of  borrowing  a  small  sum  from  the  public  in  preference  to 
getting  it  from  the  banks.  If  the  common  stock  was  to  be 
kept  by  the  owners,  it  made  little  difference  to  them  into 


52  THE  CAPITALIZATION  OF  GOODWILL 

how  few  shares  it  was  divided.  If  it  was  to  be  sold,  the 
amount  was  determined  by  the  conditions  of  the  market. 
It  was  divided  so  that  the  shares  could  be  sold  for  a  low 
enough  price  and  so  that  the  aggregate  would  net  for  the 
sellers  the  amount  that  they  desired.  Somewhere  between 
five  and  six  per  cent  was  the  usual  amount  earned  on  the 
common,  because  stock  capitalized  in  this  way  was  most 
profitably  marketed.  The  relation  between  the  figures  in 
the  second  and  fourth  columns  shows  that  there  is  no  reason 
to  believe  that  there  was  any  definite  theory  of  capitaliza- 
tion which  generally  influenced  the  incorporators. 


CHAPTER  VI 

The  Seven  Per  Cent  Preferred  Stocks  and  their 
.  Provisions 

The  kinds  of  securities  which  were  created  for  these  com- 
panies constitute  an  important  part  of  this  study  because 
these  businesses  were  incorporated  in  most  cases  merely  to 
sell  stock  and  because  the  stock  sold  was  different  in  certain 
respects  from  any  that  had  been  issued  before.  There  were 
three  kinds  of  securities  which  might  have  been  issued — 
bonds,  preferred  stocks,  and  common  stocks.  The  wide- 
spread use  of  preferred  stocks  instead  of  bonds  is  a  matter 
of  some  interest.  Did  these  companies  issue  preferred 
stocks  rather  than  bonds  because  bonds  represented  mort- 
gages on  the  property,  or  because  bonds  called  for  a  regular 
interest  even  in  times  of  depression?  Were  investors  satis- 
fied with  preferred  stocks  because  they  realized  that  a 
business  of  this  kind  could  furnish  no  real  security  for  a 
mortgage?  These  are  questions  which  cannot  be  answered 
until  after  the  development  of  preferred  stock  has  been 
traced  and  the  actual  provisions  of  the  modern  preferred 
stocks  have  been  analyzed. 

In  England  during  the  seventeenth  century  there  was 
the  gradual  emergence  in  the  joint-stock  company  of  a 
division  of  the  whole  capital  into  different  classes  with 
special  rights.  In  the  case  of  the  new  East  India  company, 
the  stock  as  such  was  divided  into  separate  classes,  each 
of  which  had  distinct  rights,  the  original  stock  being  entitled 
to  eight  per  cent,  paid  by  the  government,  and  to  certain 
contingent  advantages,  while  the  additional  stock  was  to 
receive  the  profits  made  in  trading.^  Out  of  this  differentia- 
tion of  stock  in  England  there  developed  the  debentures 
which  were  like  our  bonds  except  that  they  embodied  no 

^  Scott,  vol.  i,  p.  364. 

53 


54  THE  CAPITALIZATION  OF  GOODWILL 

mortgage  feature.  In  "The  Minutes  of  Evidence  taken 
before  the  Select  Committee  on  the  Hmited  liability  Acts," 
1867,  there  was  an  interesting  discussion  of  the  use  and 
the  rights  of  debentures  in  limited  liability  companies. 
It  was  stated  there  that  debentures  had  been  issued  to 
obtain  new  capital  when  the  company  did  not  want  to 
make  calls  on  the  original  share  holders.  The  rights  of  the 
debenture  holder  with  respect  to  the  assets,  the  earnings, 
and  the  creditors  of  the  company,  as  there  outlined,  were 
similar  in  many  respect  to  those  of  the  preferred  share 
holder. 

There  were  two  specialized  uses  to  which  preferred  stock 
was  put  in  the  earlier  development  of  corporation  finance 
in  the  United  States.  When  the  corporate  form  was  used 
as  a  financial  instrument  for  combining  individual  busi- 
nesses, preferred  stock  was  a  common  feature  in  the  financial 
plan.  The  owners  who  surrendered  their  businesses  to  the 
corporation,  received  in  many  cases  a  certain  percentage  of 
preferred  stock  as  well  as  common  stock.  This  preferred 
stock  had  a  priority  over  the  common  stock  mainly  with 
respect  to  earnings.  It  was  very  much  like  the  English 
debenture  and  merely  represented  a  differentiation  in  capital 
stock.  The  other  use  of  preferred  stock  was  one  common  in 
railroad  finance.  A  writer  in  1897  stated  that  the  majority 
of  preference  shares  in  the  hands  of  the  public  at  that  time 
had  been  issued  by  the  railways  as  evidences  of  debt  which 
the  exigencies  of  the  time  required  should  be  deferred, — 
perhaps  some  peculiar  obligation  not  then  easily  paid; 
but  more  frequently,  such  preferred  shares  had  been  given 
to  bond  holders  who  were  compelled  by  the  insolvency  of 
the  company  to  yield  something  of  the  principal  and 
interest  of  their  debt.^  In  the  reorganization  of  the  Chesa- 
peake and  Ohio  Railway  in  1888  the  bond  holders  consented 
to  readjust  their  claims  without  foreclosure,  and  took  as 
part  payment  for  the  old  bonds  a  certain  percentage  of 
first  preferred  stock.  Eleven  years  earlier  in  the  case  of 
the  Lake  Superior  and   Mississippi  Railroad  which  was 

2  T.  L.  Greene,  Corporation  Finance. 


SEVEN   PER  CENT   PREFERRED   STOCKS  55 

sold  under  foreclosure  to  the  holders  of  its  first  mortgage 
bonds,  these  bonds  were  exchanged  for  preferred  shares  at 
the  rate  of  $1200  of  such  shares  for  each  bond  of  $1000. 

The  new  seven  per  cent  preferred  stocks  differed  ma- 
terially from  both  of  these.  They  had  both  bond  features 
and  common  stock  features.  Although  the  type  of  seven 
per  cent  cumulative  preferred  stocks  employed  by  the  new 
companies  was  not  fully  developed  until  the  rise  of  these 
industrial  corporations  in  the  present  century,  there  had 
been  some  very  considerable  issues  of  industrial  preferred 
stocks  before  that  time.  In  1890  the  H.  B.  Claflin  Com- 
pany was  formed  in  New  York  City  to  take  over  the  jobbing 
business  of  H.  B.  Claflin  and  Co.  The  new  company  had 
a  capital  of  $9,000,000  divided  into  first  preferred  stock, 
bearing  cumulative  dividends  of  five  per  cent,  second  pre- 
ferred stock,  bearing  cumulative  dividends  of  six  per  cent, 
and  common  shares  covering  nearly  one  half  of  the  capitali- 
zation. But  this  preferred  stock  of  H.  B.  Claflin  and  the 
other  preferred  stocks  which  were  issued  before  the  rise 
of  the  new  industrials  were  merely  stocks  with  a  certain 
priority  and  fixed  dividend.  The  safety  features  exempli- 
fied in  the  new  seven  per  cent  preferred  stocks  were  not 
present.^  There  was  no  possibility  of  standardization  in 
the  preferred  stocks  of  the  older  period  because  they  varied 
in  role  with  every  incorporation.^  They  had  an  indefinite 
position  somewhere  between  bonds  and  stocks.  They  paid 
dividends  anywhere  from  four  per  cent  to  eight  per  cent 
and  higher;  sometimes  they  were  cumulative  and  some- 
times they  were  not. 

The  new  industrial  preferred  stocks  constituted  a  definite 
class  of  financial  instruments;  and  although  there  were 
differences  in  the  provisions  of  different  issues,  these  were 
usually  of  minor  importance.  Practically  all  of  the  stocks 
paid  seven  per  cent,  and  all  were  cumulative.  When 
Spicer  was  put  out  with  an  eight  per  cent  cumulative 
dividend  in  19 16,  the  bankers  probably  offered  the  extra 

'  One  of  the  earliest  mutual  insurance  companies  had  a  temporary 
capitalization  of  seven  per  cent  preferred  stock. 

*  Except  perhaps  in  their  use  in  railroad  reorganizations. 


56  THE  CAPITALIZATION  OF  GOODWILL 

one  per  cent  as  a  special  inducement  at  a  time  when  the 
market  was  teeming  with  so-called  speculative  issues.  The 
necessity  of  the  cumulative  feature  was  evident;  a  pre- 
ferred stock  would  have  been  little  better  than  a  common 
stock  if  the  company  could  have  deferred  the  dividend 
with  impunity.  The  regular  per  cent  paid  on  the  preferred 
stock  and  the  cumulative  feature  were  similar  in  nature  to 
bond  provisions.  Most  of  the  rights  of  the  preferred  stock 
holders,  as  set  forth  in  the  articles  of  incorporation  of  these 
industrials  were  directly  or  indirectly  provisions  for  safety, 
and  as  such  made  preferred  stocks  still  more  like  bonds. 
These  provisions  were  engrafted  on  what  would  have  been 
ordinary  shares  of  capital  stock.  Consequently,  the  dif- 
ferences between  bonds  and  stocks  may  be  used  conven- 
iently as  a  basis  of  classification  of  these  provisions. 

The  bond  is  ordinarily  a  charge  on  a  specific  piece  of 
property, — naturally  the  property  should  be  as  valuable,  if 
not  more  so,  than  the  amount  of  the  bond  issue.  Prac- 
tically every  issue  of  preferred  stock  in  the  new  industrials 
was  covered  by  the  tangible  assets  of  the  company,  even 
where  there  was  no  specific  mention  of  this  limitation  in  the 
certificate  of  incorporation.  What  was  embodied  in  prac- 
tically every  certificate  of  incorporation  was  the  require- 
ment that  the  consent  of  three-fourths  of  the  preferred 
stock  holders  should  be  given  to  any  increase  of  the  author- 
ized preferred  issue  or  to  any  mortgage,  which  would 
naturally  take  precedence  over  the  preferred  stock.  These 
provisions  as  they  appear  in  the  Certificate  of  Incorporation 
of  the  Continental  Can  Co.  are  typical : 

(4)  The  amount  of  preferred  stock  shall  not  be  Increased  nor  shall 
any  stock  having  any  preference  or  priority  over  said  preferred  stock 
be  issued  unless  such  increase  or  such  issue  shall  have  been  previously 
authorized  by  the  consent  of  at  least  three-fourths  in  interest  of  the 
then  issued  and  outstanding  stock  of  the  Company  of  each  class 
(both  preferred  and  common)  given  separately,  in  person  or  by  proxy, 
at  a  meeting  specially  called  for  that  purpose.  ...  (9)  No  mortgage, 
lien  or  encumbrance  of  any  kind  upon  any  part  of  the  real  or  personal 
property,  assets,  effects,  undertaking  or  goodwill  of  the  Company, 
shall  be  created  or  be  valid  or  effective  unless  the  same  shall  have 
been  previously  authorized  by  the  consent  of  the  holders  of  at  least 
three-fourths  in  interest  of  each  class  of  outstanding  stock  of  the 
Company  (both  Preferred  and  Common)  given  separately  in  person 


SEVEN   PER  CENT  PREFERRED  STOCKS  57 

or  by  proxy  either  in  writing  or  at  an  annual  meeting  or  at  a  special 
meeting  called  for  that  purpose;  but  this  prohibition  shall  not  be 
deemed  or  construed  to  apply  to,  nor  shall  it  operate  to  prevent,  the 
giving  of  purchase  money  mortgages,  or  other  purchase  money  liens 
on  property  to  be  hereafter  acquired  by  the  Company,  or  the 
acquisition  of  property  subject  to  mortgages,  liens  and  encumbrances 
thereon  then  existing,  nor  to  the  pledging  by  the  Company  as  security 
for  loans  made  to  it  in  the  regular  and  current  conduct  of  its  business 
or  notes  or  accounts  receivable  or  other  liquid  assets  or  of  any  stocks, 
bonds,  or  other  securities  owned  by  it. 

If  the  tangible  assets  did  not  depreciate  in  value,  the 
preferred  issues  would  always  be  covered  by  specific 
property.  Some  companies  not  only  restricted  any  in- 
crease in  the  issue  of  preferred,  but  attempted  to  make  sure 
that  the  preferred  issue  should  bear  a  certain  relation  to  the 
tangible  assets.  They  forbade  any  dividends  on  the  com- 
mon stock  unless  the  preferred  bore  a  certain  definite 
relation  to  the  assets.  In  the  Certificate  of  Incorporation 
of  The  Brown  Shoe  Company,  it  was  stated: 

In  no  event  shall  any  dividend  whatsoever  be  paid  or  declared  on 
the  Common  Stock,  unless  the  net  quick  assets  of  the  Company  and  of 
its  subsidiary  corporations  as  disclosed  by  the  then  last  statement  or 
report  of  the  Company,  certified  by  certified  public  accountants  of 
good  standing,  shall  have  been  at  least  eighty  per  cent  (80  %)  of  the 
total  amount  of  preferred  stock  then  outstanding,  and  the  total  amount 
of  the  net  tangible  assets  of  the  company  shall  have  exceeded  the 
amount  of  preferred  stock  by  one  million  dollars. 

In  the  Fisk  Tire  Company,  no  dividends  could  be 
declared  on  the  common  stock  unless  the  net  quick  assets 
of  the  Company  were  at  least  equal  to  one  hundred  and 
twenty-five  per  cent  of  the  par  value  of  the  first  preferred 
stock  of  the  Company  outstanding.  In  the  Willys-Over- 
land Company  of  19 12,  no  dividends  could  be  declared 
on  the  common  stock  unless  the  net  quick  assets  were  equal 
to  one  hundred  and  twenty-five  per  cent  of  the  outstanding 
preferred;  in  the  Willys  Company  of  1916  the  net  quick 
assets  were  to  be  one  hundred  and  ten  per  cent  of  the  pre- 
ferred before  any  dividends  over  six  per  cent  could  be 
declared  on  the  common.  In  the  M.  Rumely  Company, 
the  net  quick  assets  were  to  exceed  the  preferred  stock, 
and  in  the  Loose  Wiles  Biscuit  Company,  the  net  quick 
assets  were  to  be  equal  to  one  half  of  the  preferred  stock 


58  THE  CAPITALIZATION  OF  GOODWILL 

before  any  dividends  on  the  common  were  allowed.  The 
purpose  of  these  provisions  seems  to  have  been  the  desire 
to  assure  the  preferred  stock  holder  of  the  company's 
ability  to  pay  him  the  par  of  his  investment  and  even  a 
premium  added  thereto  in  case  of  liquidation.  In  those 
cases  where  the  net  quick  assets  were  to  be  sufficient  to 
cover  the  preferred  issue,  he  was  assured  of  a  speedy 
payment  of  his  claims. 

In  all  these  provisions,  however,  there  was  one  feature 
which  complicates  the  matter  somewhat.  The  restriction 
upon  the  payment  of  dividends  on  the  common  stock  was 
not  only  intended  to  assure  the  preferred  stock  holder  of  the 
mortgage  value  of  his  investment  but  also  to  make  certain 
the  continuance  of  his  dividends.  The  preferred  issue  was 
limited  so  that  there  would  not  be  too  many  claimants  for 
the  funds  available  for  dividends;  and  the  declaration  of 
dividends  on  the  common  stock  was  also  limited  so  that 
there  would  be  a  large  enough  fund  available  for  preferred 
dividends  to  be  paid  in  the  future.  In  the  majority  of 
cases  the  provisions  of  the  certificates  of  incorporation 
were  intended  to  dispel  the  fear  which  might  otherwise 
have  attacked  the  preferred  investor, — the  fear  that  the 
company  would  distribute  more  to  the  common  stock 
holders  than  was  consistent  with  safety. 

Certain  other  provisions  found  in  the  cases  of  these 
preferred  stocks  look  also  primarily  to  the  protection  of 
the  dividends  of  the  preferred  stockholder.  In  the  Under- 
wood Typewriter  Company  and  in  the  May  Department 
Stores  Co'mpany,  salaries  were  limited  to  $60,000  a  year. 
In  the  first  case  this  amount  could  be  increased  if  the  net 
earnings  passed  the  million  mark;  but  even  then  only  to 
the  extent  of  six  per  cent  of  the  earnings.  In  the  May 
Department  Stores  Company  this  limitation  was  to  last 
for  three  years;  thereafter,  the  amount  to  be  paid  in  salaries 
could  be  increased  by  a  sum  equal  to  one-half  of  one  per 
cent  of  the  sales.  In  the  Henry  Sonneborn  Company,  too, 
such  a  limitation  on  the  amount  available  for  salaries 
was  incorporated  in  the  provisions  intended  to  protect  the 


SEVEN  PER  CENT  PREFERRED  STOCKS  59 

dividends  of  the  preferred  stock  holders.  In  the  Julius 
Kayser  Company  there  could  be  no  expenditure  (in  cash, 
stock,  bonds,  debentures,  or  otherwise)  in  the  aggregate 
exceeding  $200,000  for  the  purchase  of  additional  mills  or 
properties,  or  in  otherwise  adding  to  the  corporations  exist- 
ing fixed  capital  assets,  unless  at  the  time  of  the  authoriza- 
tion of  such  expenditure  the  net  quick  assets  of  the  corpora- 
tion were  equal  in  amount  to  the  par  value  of  the  first 
preferred  stock  outstanding,  plus  the  amount  of  such 
expenditures.^  In  the  Brown  Shoe  Company  the  issue  of 
the  full  amount  of  authorized  preferred  stock  was  con- 
tingent upon  the  earnings  being  twice  the  preferred  divi- 
dends. In  the  Owens  Glass  Bottle  Machine  Co.  the  vote 
of  the  preferred  stock  holders  was  not  necessary  in  order 
to  increase  the  issue;  but  no  new  preferred  stock  could  be 
issued  unless  the  earnings  for  the  last  year  or  the  average 
earnings  for  three  years  were  equal  to  two  and  one  half 
times  the  dividends  on  the  preferred  stock,  including  that 
which  was  to  be  issued,  and  unless  the  outstanding  pre- 
ferred issue  plus  the  new  preferred  issue  was  less  than 
seventy-five  per  cent  of  the  net  assets  of  the  company 
including  the  assets  to  be  acquired  from  the  issuance  of 
the  additional  preferred  stock. 

Whether  or  not  the  mortgage  feature  of  a  bond  is  valuable 
because  it  pledges  a  specific  property,  it  certainly  constitutes 
a  valuable  weapon  in  the  hands  of  the  bond  holders,  who 
have  a  contingent  right  of  foreclosure.  The  preferred  stock 
holder  was  given  a  somewhat  similar  weapon.  With  few 
exceptions  the  preferred  stock  holder,  like  the  bond  holder, 
had  no  vote  in  the  affairs  of  the  company.^  However,  if 
there  was  any  default  in  the  payment  of  preferred  dividends, 
the  preferred  stock  holders  were  given  voting  power.  In 
some  of  the  earlier  industrials,  for  example.  Underwood 
Typewriter,  May  Department  Stores,  Studebaker,  the 
preferred  stock  holders  were  to  assume  control  after  two 
quarterly  defaults;  in  the  majority  of  cases  four  quarterly 

5  Otherwise  two-thirds  of  the  preferred  votes  had  to  consent  to  such 
expenditure. 

8  Exceptions  were  Loose  Wiles,  Goodyear,  Pettibone  Mulliken. 


60  THE  CAPITALIZATION  OF  GOODWILL 

defaults  were  necessary,  although  in  Rumely  only  one 
default,  and  in  Armsby  as  many  as  eight  defaults  were  to 
precede  the  assumption  of  control.  In  some  cases  the 
preferred  stock  holders  were  to  vote  as  a  class,  with  the 
common  stock  holders  voting  as  a  class,  after  the  specified 
number  of  defaults.  In  the  great  majority  of  cases,  how- 
ever, the  preferred  stock  holders  were  to  take  over  the 
entire  control  of  the  company,  in  case  of  its  inability  to  pay 
their  dividends. 

It  seems  reasonably  clear  that,  except  in  those  cases  where 
the  contrary  is  distinctly  stated,  the  directors  have  the 
right  to  sell  the  assets  of  the  corporation  without  the  con- 
sent of  the  stock  holders.  In  some  cases,  this  right  was 
modified.  In  the  Underwood  Typewriter  Company  the 
preferred  stock  holders  had  the  right  to  assume  control  after 
two  consecutive  defaults  in  quarterly  dividends;  but  their 
right  of  disposal  of  the  property  was  limited  by  a  provision 
which  made  it  impossible  for  the  directors  of  the  corporation 
to  sell  any  part  of  the  assets  without  the  consent  of  three- 
fourths  of  all  outstanding  capital  stock  of  the  company, — 
each  class  of  stock  voting  separately.  Thus,  the  common 
stock  holders  could  have  prevented  the  dissolution  of  the 
company.  Furthermore,  in  those  cases  where  the  default 
in  a  certain  number  of  quarterly  dividends  gave  the  pre- 
ferred stock  holders  only  a  joint  control  with  the  common, 
the  assent  of  the  common  stock  was  necessary  before  any 
disposal  of  the  assets  was  possible.  But  in  the  great  number 
of  instances  the  preferred  stock  holders  were  to  assume 
the  entire  control  after  the  specified  defaults,  and  would 
thus  be  in  a  position  to  effect  a  sale  of  the  cornpany  through 
the  directors  whom  they  elected,  unless  the  directors  were 
restricted  by  some  provision  of  the  certificate  of  incor- 
poration. 

It  is  probable  that  the  common  stock  holders  in  most 
cases  would  have  voted  against  dissolution,  since  the  pre- 
ferred stock  holders  were  entitled  to  the  par  value  of  their 
holdings  and  in  most  cases  a  premium,  before  any  other 
distribution  of  assets  to  the  common  stock  holders  was 


SEVEN  PER  CENT  PREFERRED  STOCKS  6 1 

possible.  The  practice  with  respect  to  the  payment  of 
premiums  was  of  two  kinds.  In  the  case  of  Emerson- 
Brantingham,  upon  dissolution,  voluntary  or  involuntary, 
the  holders  of  the  preferred  were  entitled  to  be  paid  in 
full  $115  per  share  and  unpaid  accrued  cumulative  dividends 
thereon,  before  anything  was  paid  to  the  holders  of  the 
common  stock.  However,  the  more  common  provision 
was  that  which  is  exemplified  in  the  following  quotation 
from  the  Pettibone-Mulliken  certificate:  "In  the  event  of 
any  liquidation  or  dissolution  or  winding  up  of  the  Corpora- 
tion the  holders  of  record  of  the  First  Preferred  Stock  shall 
be  entitled  to  be  paid  in  full  the  par  amount  of  their  shares, 
and,  in  the  event  of  any  voluntary  liquidation  dissolution 
or  winding  up  caused  otherwise  than  by  bankruptcy  or 
insolvency,  a  further  amount  equal  to  fifteen  per  cent  of 
such  par  amount,  and  all  accrued  dividends."  The  theory 
was  that  in  case  of  difficulty  and  involuntary  dissolution 
the  preferred  stock  holder  was  entitled  to  the  par  value  of 
his  investment ;  but  in  a  voluntary  dissolution  which  might 
be  the  result  of  a  desire  on  the  part  of  the  common  stock 
holders  to  get  rid  of  the  preferred  stock,  the  preferred  stock 
holders  were  to  be  paid  a  premium.  This  premium  varied 
from  ten  to  twenty-five  per  cent  of  the  par  value,  and 
coincided  with  the  redemption  price  offered  by  the  com- 
pany when  it  called  in  the  preferred  for  the  sinking  fund. 
Perhaps  the  most  characteristic  of  the  bond  features 
which  was  engrafted  on  the  preferred  stock  was  the  sinking 
fund  provision.  The  bond  is  a  debt  of  a  company.  Except 
in  the  case  of  certain  special  classes  of  securities,  for 
example,  railroad  bonds,  the  investor  had  usually  demanded 
that  provision  should  be  made  in  the  loan  contract  for  the 
extinction  of  the  debt  from  earnings.  Either  a  certain 
amount  of  the  bonded  debt  is  paid  each  year  until  all  of 
it  is  wiped  out,  or  provision  is  made  for  the  accumulation 
of  a  fund  which  eventually  will  retire  the  entire  issue. 
Poth  of  these  methods  of  amortization  were  used  in  the 
different  preferred  issues.  Practically  all  of  the  companies 
here  considered  were  required  to  provide  a  specified  sum 


62  THE  CAPITALIZATION  OF  GOODWILL 

of  money  each  year  to  be  used  in  the  retirement  of  the 
preferred  stock.''  In  those  cases  in  which  immediate  re- 
demption was  required,  it  was  provided  that  if  the  stock 
could  not  be  purchased  in  the  market  below  a  certain  price, 
known  as  the  redemption  price,  shares  were  to  be  called  in. 
Usually  a  certain  proportion  of  each  preferred  share  holder's 
holdings  was  to  be  called  for  redemption.  In  very  few 
cases  was  redemption  by  lot  provided  for.  In  Rumely  Co., 
Manhattan  Shirt  Co.,  Armsby  Co.,  Continental  Can  Co., 
National  Cloak  and  Suit  Co.,  and  Jewel  Tea  Co.,  the 
method  to  be  used  in  calling  for  redemption  was  left  to  the 
judgment  of  the  directors.^ 

One  of  the  simplest  serial  redemption  provisions  was 
that  of  the  B.  F.  Goodrich  Company. 

The  Company  shall  annually,  out  of  the  surplus  profits  of  the  Com- 
pany, if  sufficient,  after  all  cumulated  and  defaulted  dividends  (if  any) 
upon  said  preferred  stock  shall  have  been  paid,  or  set  apart,  acquire  by 
redemption  or  purchase  thereof  in  such  manner  as  the  Board  of  Directors 
may  determine  from  time  to  time,  but  at  not  to  exceed  $125  per  share 
plus  accrued  and  unpaid  dividends  thereon,  at  least  three  per  cent 
(3  %)  of  the  largest  amount  in  par  value  of  said  preferred  stock  that 
shall  have  been  at  any  one  time  issued  and  outstanding.  If  less  than 
the  said  amount  of  preferred  stock  shall  be  acquired  by  the  Company 
in  any  year  the  deficiency  (before  any  dividend  on  the  common  stock 
shall  be  paid  or  set  apart)  shall  be  made  good  out  of  the  surplus  profits 
in  subsequent  years. 

Three  per  cent  of  the  preferred  issue  was  to  be  withdrawn 
each  year  until  after  thirty-four  years  the  preferred  stock 
was  all  to  be  wiped  out. 

In  a  few  companies,  a  specified  sum  of  money  was  to  be 
set  aside  each  year,  but  the  use  of  this  money  or  of  all  of 
it  for  the  immediate  purchase  and  retirement  of  preferred 
stock  was  not  imperative.  For  example,  in  the  certificate 
of  incorporation  of  Julius  Kayser  and  Co.,  it  was  provided 
that  the  company  was  to  put  aside  $200,000  each  year, 
and  to  spend  $150,000  of  the  fund  in  the  redemption  of 
preferred  stock.     In  the   Brown  Shoe  Company  and  in 

^  The  only  exceptions  were  some  of  the  early  industrials,  e.g.,  the 
United  Cigar  Manufacturers. 

8  The  Henry  Sonneborn  Co.,  when  it  was  necessary  to  wipe  out  a 
certain  amount  of  preferred,  asked  the  preferred  stock  holders  to  state 
the  price  which  they  would  take  for  their  holdings. 


SEVEN   PER  CENT   PREFERRED   STOCKS  63 

Cluett-Peabody  either  2|  per  cent  of  the  preferred  issue 
was  to  be  retired  annually,  or  a  sum  of  money  sufficient 
to  redeem  such  a  percentage  of  the  issue  was  to  be  put  aside 
each  year  until  after  four  years  when,  the  aggregate  of 
these  sums  being  large  enough  to  purchase  10  per  cent  of 
the  issue,  it  was  to  be  applied  immediately  to  the  purchase 
and  retirement  of  preferred  stock.  Whether  the  com- 
pulsory retirement  of  preferred  stock  each  year  or  the 
accumulation  of  a  sinking  fund — ^which  was  in  extreme 
cases  available  for  preferred  dividends  and,  perhaps,  even 
for  actual  business  purposes  in  many  industrials — ^was 
preferable  from  the  preferred  stock  holder's  point  of  view 
may  be  questioned.  The  compulsory  retirement  of  the 
preferred  stock  was  the  usual  method. 

There  are  many  evidences  in  these  provisions  that  the 
preferred  stock  was  looked  upon  as  a  form  of  indebtedness 
which  it  was  the  duty  of  the  company  to  discharge  as 
rapidly  as  possible  especially  if  times  were  good.  In  prac- 
tically every  company  no  dividend  could  be  paid  on  the 
common  until  the  "Special  Surplus  Account"  or  the  "Pre- 
ferred Stock  Sinking  Fund,"  as  it  was  variously  called, 
had  been  provided  for.  Furthermore,  no  dividend  over 
4  per  cent  on  the  common  was  allowed  in  Underwood,  May, 
Kayser,  Studebaker,  Woolworth,  etc.,  unless  there  had  been 
accumulated  a  considerable  reserve  over  and  above  the 
special  surplus  account.  In  the  case  of  Emerson-Branting- 
ham,  Willys-Overland,  Jewel  Tea,  and  others,  somewhat 
higher  dividends  (6  and  7  per  cent)  were  allowed;  but 
before  any  dividends  beyond  this  rate  could  be  paid  an 
additional  surplus  was  necessary.  In  some  of  the  companies 
put  out  by  William  Salomon  &  Co.  there  was  one  very 
interesting  type  of  provision.  In  these  companies,  if  any 
dividend  above  a  certain  per  cent  was  declared,  the  amount 
of  the  installment  paid  to  the  sinking  fund  had  to  be  in- 
creased. In  the  Pettibone,  MuUiken  Company,  if  any 
dividends  in  excess  of  six  per  cent  were  paid  upon  the 
common  stock,  then  the  payment  to  the  first  preferred 
stock  sinking  fund  next  payable  after  the  declaration  of 


64  THE  CAPITALIZATION  OF  GOODWILL 

such  dividend  was  to  be  increased  by  a  sum  equal  to  the 
amount  of  dividends  in  excess  of  six  per  cent  so  paid  upon 
the  common  stock.  Emerson-Brantingham  and  Rumely 
had  similar  provisions.  If  the  sinking  funds  of  the  new 
industrials  were  not  kept  up  in  times  of  depression  the 
obligation  was  in  most  cases  cumulative  and  the  deficit 
had  to  be  made  up  in  subsequent  years  before  any  dividends 
on  the  common  stock  could  be  paid.  In  some  cases  these 
special  surplus  accounts  were  even  available  for  preferred 
dividends  in  times  of  emergency ;  but  it  was  always  provided 
that  there  should  be  subsequent  compensation  for  such 
withdrawals. 

The  review  of  the  preferred  stock  provisions,  which  has 
been  given,  is  sufficient  evidence  of  the  fact  that  the  invest- 
ment bankers,  the  lawyers,  and  the  owners  looked  upon  the 
position  of  the  preferred  stock  holder  as  highly  analogous 
to  that  of  a  bond  holder.  But  there  were  important 
differences  between  the  bond  and  the  preferred  stock.  A 
summary  recapitulation  of  the  likenesses  and  of  the  dis- 
similarities of  the  two  classes  of  instruments  immediately 
leads  to  important  conclusions.  First,  the  size  of  pre- 
ferred issues  in  some  cases  was  restricted,  as  in  bond  issues 
by  the  tangible  assets  of  the  company.  But  the  desire  to 
limit  the  amount  of  preferred  stock  so  as  to  be  able  to  pay 
the  preferred  dividends  was  as  strong  a  factor  in  this 
provision  as  the  desire  to  keep  the  size  of  the  issue  within 
the  value  of  the  property  of  the  corporation.  Second,  the 
requirement  that  the  consent  of  three-fourths  of  the  pre- 
ferred stock  holders  should  be  necessary  to  any  mortgage 
suggests  the  first  mortgage  feature  of  the  bond;  but  the 
requirement  of  such  consent  to  any  increase  of  preferred 
stock  seems  to  show  that  what  the  preferred  stock  holder 
was  as  much  interested  in  was  the  fact  that  he  had  a  prior 
lien  on  earnings.  Third,  the  preferred  stock  holder  like 
the  bond  holder  had  no  voting  power  in  the  ordinary 
affairs  of  the  company.  However,  if  he  did  not  receive  a 
certain  number  of  his  quarterly  dividends  he  had  the  right 
to  vote.    Thus,  this  contingent  control  was  the  weapon 


SEVEN   PER  CENT   PREFERRED   STOCKS  65 

he  might  use  whenever  he  was  not  paid  his  dividends. 
Bond  holders  will  not  always  sell  the  property;  and  seldom 
do  they  do  so  advantageously.  Preferred  stock  holders 
were  not  always  given  the  power  to  sell  the  corporation; 
but  contingent  control  might  prove  as  effective  as  the 
possibility  of  foreclosure  in  the  case  of  the  bond  holder. 
Fourth,  the  amortization  provision  was  a  very  character- 
istic bond  feature,  but  the  greater  flexibility  in  application 
was  characteristic  of  preferred  stocks. 

The  preferred  stock  provisions  underwent  an  almost 
continuous  development.  The  first  two  industrials  of  this 
class  were  the  United  Cigar  Manufacturers  and  Sears 
Roebuck.  In  the  case  of  the  United  Cigar  Manufacturers, 
there  were  no  quasi-bond  features  attaching  to  the  preferred 
stock  beyond  the  provision  that  the  dividend  should  be 
cumulative.  There  was  a  greater  complexity  in  the  provi- 
sions of  the  Sears  Roebuck  preferred ;  but  it  was  not  until 
later  that  the  standard  provisions  were  developed.  The 
preferred  stock  holders  were  looked  upon  as  a  type  of 
partners  in  these  earliest  companies,  and  in  the  absence  of 
any  provision  for  retirement,  they  remained  partners. 
Subsequently,  the  United  Cigar  Manufacturers  Company 
found  it  disagreeable  to  be  forced  to  retain  these  partners 
after  they  could  have  dispensed  with  them.  The  preferred 
stock  provisions  in  the  incorporations  that  followed  evi- 
denced a  change  in  attitude  on  the  part  of  the  owners  and 
bankers.  Preferred  stock  holders  came  to  be  considered 
as  a  lenient  type  of  bond  holder.  Sears  Roebuck  at  first 
planned  to  issue  bonds,  but  they  were  shown  the  advantages 
of  preferred  stock  and  the  desirability  of  being  able  to  put 
off  a  dividend  payment  if  necessary.  The  provisions  for 
amortization  in  any  issue  of  industrial  bonds  would  have 
been  severe;  whereas  preferred  stocks  could  be  retired  in 
good  times  and  kept  out  in  times  of  depression. 

The  writers  who  have  argued  that  these  industrial  cor- 
porations did  not  have  large  enough  values  in  tangible 
assets  for  bond  issues  were  certainly  in  error.  Sears  Roe- 
buck, B.  F.  Goodrich,  Deere,  Studebaker,  F.  W.  Woolworth 


66  THE  CAPITALIZATION  OF  GOODWILL 

— all  these  businesses  might  have  issued  bonds  instead  of 
preferred  stock.  As  a  matter  of  fact,  Deere  and  Studebaker 
did  have  small  bond  issues.  It  was  not  the  lack  of  assets, 
but  the  variability  of  earnings  which  turned  the  scale  in 
favor  of  preferred.  These  industrials,  from  their  very 
nature,  showed  great  fluctuations  in  earnings.  The  greater 
elasticity  of  the  preferred  stock  was  preferable  to  the  rigid 
requirements  of  the  bond.  Instead  of  six  per  cent  bonds, 
seven  per  cent  preferred  stock  was  issued.  It  was  better 
to  pay  an  extra  one  per  cent  for  money  when  it  could  be 
borrowed  on  easier  terms.  The  easier  terms  consisted  in 
the  possibility  of  letting  a  few  dividend  payments  slip  by, 
or  in  neglecting  the  sinking  fund  temporarily. 

From  the  investor's  point  of  view  the  preferred  stock 
was  practically  as  good  as  the  bond.  Conclusive  proof  of 
this  is  offered  by  the  fact  that  those  bonds  which  were  put 
out  by  similar  companies  sold  on  about  a  six  per  cent  basis, 
which  was  practically  the  basis  on  which  the  better  pre- 
ferred stocks  sold.  The  interest  on  a  bond  in  an  industrial 
with  great  fluctuations  in  earning  power  might  have  received 
more  immediate  attention  than  the  preferred  dividends, 
but  this  prompt  payment  might  have  been  detrimental 
even  to  the  bond  holder's  ultimate  interest.  The  preferred 
stock  holder's  position  was  practically  as  good  as  that  of 
the  bond  holder  except  for  the  fact  that  he  had  no  absolute 
mortgage  on  the  company's  assets.  The  possibility  of 
contingent  control  and  the  prior  lien  on  assets  was  not 
thought  of  primarily  as  a  mortgage  right;  it  was  merely  a 
weapon,  and  constituted  a  safeguard  of  a  kind  no  different, 
for  example,  from  that  which  results  from  the  election  of 
honest  directors.  Those  preferred  stocks  which  carried 
with  them  the  greatest  potential  rights  to  effect  dissolutions 
probably  sold  at  no  higher  prices  than  those  which  had  the 
smallest  amount  of  contingent  control. 

Naturally,  the  subject  of  bond  issues  in  these  industrials 
is  not  of  great  importance.  The  difficulty  of  the  Rumely 
Company  when  it  was  unable  to  meet  its  interest  obligations 
was  evidence  of  the  danger  of  a  bond  issue  for  a  new  com- 


SEVEN- PER  CENT   PREFERRED  STOCKS  67 

pany  with  great  fluctuations  in  earning  power.  Studebaker 
converted  large  outstanding  liabilities  into  an  issue  of 
$8,000,000  of  5  per  cent  serial  gold  notes,  which  were 
retired  rapidly.  This  bond  issue  occurred  only  a  year 
after  the  original  flotation  and  was  the  result  perhaps  of 
the  under-capitalization  of  the  preferred  issue.  There  were 
no  reasons,  other  than  technical  ones,  why  Studebaker  did 
not  issue  more  preferred  stock  rather  than  bonds.  Stern 
Bros,  changed  a  bond  issue  into  one  of  preferred  stock,  but 
merely  for  reasons  of  taxation.  Deere  and  Co.  had  a  bond 
issue  before  the  preferred  stock  flotation,  and  retained  it 
after  the  flotation. 


CHAPTER  VII 

The  Success  of  the  New  Industrial  Corporations 

A  valuable  judgment  as  to  the  success  of  these  flotations 
would  require  as  its  basis  a  longer  experience  than  is  avail- 
able. A  record  of  only  a  few  years,  affected  by  such  an 
abnormal  influence  as  the  European  War,  makes  the  task  of 
generalization  difficult  and  of  doubtful  value.  There  are 
at  least  four  different  points  of  view  from  which  their  suc- 
cess might  be  appraised.  The  owner,  the  banker,  the 
investor,  and  the  public  undoubtedly  had  different  opinions 
as  to  what  constituted  success.  In  many  respects  there 
was  agreement,  but  the  conflicts  of  interest  were  numerous. 

The  owner's  primary  interest  was  the  net  profits.  After 
incorporation,  as  before  incorporation,  he  was  interested  in 
having  his  business  make  more  each  year.  Provided  he 
held  the  common  stock  or  a  part  of  it,  he  wanted  large 
earnings.  It  made  little  difference  whether  those  shares 
represented  large  or  small  portions  of  the  business;  the 
more  the  business  made,  the  more  he  received.  The 
assumption  was  that  the  man  who  managed  the  business 
held  the  bulk  of  the  common  stock.  The  bankers,  in 
many  cases,  as  has  been  said,  tried  to  enforce  this,  if  only 
for  a  limited  number  of  years.  If  the  man  or  men  who 
managed  the  business  did  not  own  any  considerable  part 
of  the  common  stock,  the  owner  (in  the  sense  that  he  is 
defined  here)  did  not  really  exist,  as  an  independent  factor. 
Of  course,  the  owner  may  have  had  a  great  temporary 
interest  in  the  price  of  the  preferred  stock,  if  he  wanted  to 
unload  a  block  of  his  preferred  holdings.  But  generally 
speaking,  the  actual  earnings  over  and  above  all  preferred 
dividends  were  the  owner's  principal  concern. 

The  banker,  too,  was  interested  in  earnings,  because 
they  affected  the  securities  which  he  had  created.     The  good 

68 


SUCCESS  OF  THE  NEW  INDUSTRIAL  CORPORATIONS       69 

reputation  of  the  preferred  stocks,  which  he  had  sold  his 
customers,  was  a  matter  of  great  importance  to  him. 
Upon  their  safety  and  their  dividend  paying  regularity 
his  reputation  rested.  Furthermore,  inasmuch  as  he  had 
received  common  stock  bonuses  in  return  for  his  work, 
he  had  a  direct  interest  in  the  price  of  the  common  stock. 
The  banker's  interest  was,  thus,  closely  allied  to  that  of  the 
investor.  However,  the  buyer  of  preferred  or  common 
stocks  may  at  times  have  had  a  very  different  point  of 
view  from  that  of  the  banker.  The  buyer  of  preferred 
stocks  may  not  have  considered  only  regularity  of  dividends ; 
he  may  have  bought  for  a  rise.  The  bankers  and  the  buyers 
of  common  stock  may  have  had  very  different  ideas  as  to 
what  policy  was  proper  with  respect  to  common  dividends. 

How  the  flotation  of  these  companies  on  the  stock  ex- 
change affected  their  earnings  is  not  an  easy  question.  In 
some  cases  the  increase  in  net  profits  after  incorporation 
was  due  to  an  accounting  technicality.  If  a  business  used 
any  of  the  proceeds  from  the  preferred  to  pay  debts  on 
which  it  had  been  paying  interest,  its  earnings  for  dividends 
were  increased  since  the  interest  paid  before  incorporation 
was  subtracted,  whereas  no  part  of  the  preferred  dividend 
was  deducted  in  computing  profit.  It  might  be  conjectured 
that  the  new  method  of  financing,  made  possible  by  these 
flotations,  may  have  brought  about  an  increase  and  even  a 
greater  stability  in  earnings.  On  the  whole,  however,  those 
companies,  from  which  the  owners  withdrew  the  proceeds 
obtained  from  the  sale  of  the  preferred,  showed  as  great 
and  even  greater  success  than  the  others. 

The  companies  which  had  the  least  success  were  the 
agricultural  implement  companies.  (See  last  two  tables 
at  the  end  of  this  chapter.)  Some  of  them  had  issued  bonds 
before  the  general  spread  of  the  new  form  of  capitalization 
but  not  to  the  same  extent  as  in  the  subsequent  period. 
These  companies  had  had  great  fluctuations  in  earnings 
before  191 1  and  1912 ;  but  the  greater  possibility  of  market- 
ing securities  after  flotation  may  have  helped  to  bring  on 
the  disasters  which  they  suffered.^ 

1  See  appendix  i. 


70  THE  CAPITALIZATION  OF  GOODWILL 

One  bad  effect  of  the  flotation  of  these  businesses,  which 
was  indirectly  prejudicial  to  the  owner's  interest,  was  the 
belief  in  certain  cases  in  the  necessity  of  declaring  and 
paying  common  stock  dividends,  which  were  not  earned. 
In  1914,  when  Brown  Shoe  had  no  justification  whatsoever, 
a  dividend  of  3  per  cent  was  declared  on  the  common  stock. 
Manhattan  Shirt  declared  a  dividend  in  191 5,  after  three 
years  of  steady  fall  in  earnings.  The  May  Department 
Stores  Co.,  in  the  same  year  continued  a  dividend  of  5  per 
cent  when  its  earnings  offered  no  justification  for  such  a 
policy.  The  need  of  a  good  showing  and  the  publicity 
attendant  upon  these  dividends  probably  suggested  a  degree 
of  generosity  which  a  private  corporation  would  not  have 
considered. 

The  effect  of  the  advertising  value  of  these  flotations 
on  the  earnings  was  believed  to  be  considerable.  In  the 
report  of  Loose  Wiles  for  its  bad  year  191 5,  the  president 
of  the  company  exhorted  each  stock  holder  to  become  a 
patron  and  "rooter"  for  the  Sunshine  biscuit.  The  effect 
of  being  listed  on  the  stock  exchange  on  the  businesses  of 
Woolworth  and  Kresge  may  seem  inconsequential;  never- 
theless, those  in  a  position  to  know  believed  it  a  matter  of 
some  value.  In  the  case  of  B.  F.  Goodrich,  of  Sears  Roe- 
buck, and  of  Underwood  Typewriter,  the  flotation  was  said 
to  have  furnished  effective  advertisement. 

A  study  of  the  actual  earnings  of  these  companies  before 
flotation,  as  given  in  a  preceding  chapter,  shows  that  the 
most  successful  businesses  from  the  point  of  view  of  the 
owner  were  those  whose  earnings  were  stabilized  either 
because  they  satisfied  varied  demands  or  depended  upon  the 
supply  of  no  one  particular  raw  material.  The  chains  of 
five  and  ten  cent  stores  and  Sears  Roebuck  were  the  most 
successful  industrials  because  they  were  not  seriously 
affected  by  any  one  local  or  particular  disturbance.  (See 
tables  at  the  end  of  this  chapter.)  No  one  section  of  the 
country,  no  one  raw  material,  no  one  demand  was  able  to 
do  them  injury.  These  conditions  were  not  altered  by  the 
reincorporation  of  the  companies.    The  May  Department 


SUCCESS  OF  THE  NEW  INDUSTRIAL  CORPORATIONS        7 1 

Stores  was  too  small  a  chain  not  to  have  been  affected  by 
the  local  difficulty  which  the  Pittsburgh  store  encountered. 
The  Brown  Shoe  showed  decreases  in  earnings  because  of 
the  fall  off  in  the  local  demand,  and  B.  F.  Goodrich  because 
of  the  decline  in  the  value  of  its  inventories  of  raw  material. 

There  was  another  class  of  persons  who  held  common 
stock  besides  the  owners  and  the  bankers,  namely,  the 
investors.  As  has  been  explained,  the  owner  was  not 
ordinarily  so  vitally  interested  in  the  actual  value  or  yield 
of  each  particular  share  of  common  stock,  but  the  banker 
and  the  buyer  of  such  stock  did  have  that  interest.  As 
far  as  dividends  on  these  common  stocks  were  concerned, 
there  were  not  a  great  many  paid.  The  price  of  the 
common  stocks,  however,  rose  in  most  cases  with  the 
natural  increases  in  earnings;  and  most  of  them  shot  up 
to  high  figures  after  the  outbreak  of  the  European  War. 
On  the  whole,  these  industrials  paid  their  preferred  divi- 
dends but  few  of  them  showed  any  regularity  in  dividends 
on  the  common. 

The  effect  of  the  capitalization  on  the  subsequent  history 
of  these  common  stocks  is  very  interesting.  Other  things 
being  equal,  a  conservatively  capitalized  common  stock 
was  naturally  more  valuable  than  a  less  conservatively 
capitalized  one.  But  those  companies  which  had  compara- 
tively large  common  issues  at  the  time  of  incorporation 
(that  is,  companies  which  showed  a  small  percentage  earned 
on  the  common)  were  less  tempted  to  declare  dividends 
even  though  their  earnings  might  have  increased  as  rapidly 
as  those  of  the  more  conservatively  capitalized  companies 
that  did  declare  dividends.  These  did  not  pay  dividends 
partly  because  the  dividends  which  they  could  have  de- 
clared would  have  been  insignificant.  Thus,  the  money 
was  returned  to  the  business  and  expansion  was  possible. 
Of  course,  Studebaker  had  a  bad  year  in  1913;  but  after- 
wards the  policy  of  not  paying  common  dividends  brought 
good  results,  whereas  Willys-Overland  did  a  remarkable 
business  all  along,  but  paid  large  dividends,  some  of  which 
perhaps  ought  to  have  been  returned  to  the  business.     Hart, 


72  THE  CAPITALIZATION  OF  GOODWILL 

Schaffner  &  Marx  showed  only  3.9  per  cent  on  the  common 
at  the  time  of  incorporation.  In  the  first  year  thereafter, 
even  less  was  earned  on  the  common,  but  as  the  earnings 
improved  they  were  not  distributed  in  dividends.  Nothing 
was  paid  on  the  common  until  the  small  dividend  of  one 
per  cent  in  1915.  Hart,  Schaffner  &  Marx  was  unable  to 
pay  large  common  dividends,  and  thus  kept  the  surplus 
earnings  in  the  business  for  purposes  of  expansion.  This 
raises  the  question  as  to  whether  those  companies  which 
were  less  conservatively  capitalized  were  not  in  the  end 
really  better  off.  Of  course,  from  the  common  stock 
holder's  point  of  view  the  absence  of  dividends  was  not 
always  looked  upon  so  favorably. 

An  interesting  illustration  of  the  relation  between  capital- 
ization and  the  payment  of  common  stock  dividends  is 
furnished  by  a  comparison  of  Woolworth  and  Kresge. 
Woolworth  had  a  much  less  conservative  preferred  issue 
than  Kresge  but  a  much  more  conservative  common  one. 
Even  though  the  earnings  of  Kresge  advanced  as  rapidly 
as  those  of  Woolworth  and  at  certain  periods  much  more 
rapidly,  Woolworth  paid  much  more  in  common  stock 
dividends.  Kresge  put  all  surplus  earnings  back  into  the 
business  and  as  a  result  showed  a  much  more  remarkable 
expansion  than  Woolworth.  From  the  point  of  view  of  the 
common  stock  holder  the  Woolworth  method  of  financing 
was  more  advantageous  in  most  respects;  but  from  almost 
every  other  point  of  view  the  Kresge  method  led  to  safer 
and  better  results.     (See  tables  at  the  end  of  this  chapter.)^ 

The  apparently  fortunate  outcome  of  what  was  actually 
often  an  over-capitalized  common  stock  shows,  on  fur- 
ther study,  a  definite  relation  to  another  circumstance. 
Many  of  the  companies  which  in  191 1  and  1912  had  large 
common  stock  issues  pulled  through  because  of  the  great 
increase  in  earnings  resulting  from  the  European  War. 
Many  companies,  which  would  have  been  earning  little  or 
nothing  on  their  common  issues  and  would  have  paid  no 
dividends,  made  great  strides  after  the  outbreak  of  the  War. 

2  See  appendix  iv. 


i 


SUCCESS  OF  THE  NEW  INDUSTRIAL  CORPORATIONS        73 

B.  F.  Goodrich  had  had  a  difficult  time  after  incorporation, 
but  the  War  brought  it  prosperity.  And  this  is  but  one 
example.  It  is  an  interesting  question  whether  it  was  the 
earnings  on  these  common  stocks  or  the  dividends  paid 
which  had  most  to  do  with  the  price  for  which  they  sold 
in  the  market.  Of  course,  the  amount  earned  might  have 
had  less  effect  on  the  prices  for  the  common  stock  in  any 
year,  as  the  report  was  usually  not  published  until  the  end 
of  the  year.  Furthermore,  many  buyers  who  made  no 
extensive  calculations  were  satisfied  that  where  large  divi- 
dends were  paid  there  must  have  been  large  earnings. 
As  a  matter  of  fact,  the  prices  of  these  stocks  rose  with  the 
increases  in  earnings  and  the  increase  in  the  earnings  on 
the  common  stock,  but  the  effect  of  the  actual  payment  of 
dividends  on  the  prices  of  the  common  stocks  was  far  more 
noticeable.  The  great  increase  in  the  earnings  of  Stude- 
baker  in  1914  had  no  effect  on  the  depressed  prices  of  the 
common,  but  the  dividend  in  191 5,  which,  of  course,  was 
the  result  of  great  progress  in  earning  power,  sent  the 
stock  to  a  high  level.  Kresge  and  Woolworth  common 
showed  the  great  influence  of  dividends  on  the  prices  of 
these  stocks  in  the  market.  Of  course,  dividends  which 
were  obviously  too  large  did  not  have  the  same  effect. 
The  4  per  cent  dividend  paid  by  Cluett-Peabody  in  1914, 
clearly  a  bad  year  for  that  company,  caused  only  a  small 
rise  in  the  value  of  the  common  stock,  which  had  never 
before  paid  a  dividend.  Too  large  a  dividend,  which  might 
have  hindered  expansion  and  even  have  hampered  the 
regular  business  of  a  company  deceived  no  careful  investor. 
Certain  special  circumstances  explain  why  some  of  these 
preferred  stocks  sold  at  a  higher  price  than  others  equally 
as  good.  First,  the  larger  and  better  known  the  company, 
the  higher  was  the  price  of  the  preferred  stock,  other  things 
being  equal.  Kresge's  preferred  issue  was  more  conserva- 
tive than  that  of  Woolworth.  Yet  Woolworth  preferred 
sold  at  a  higher  price  than  Kresge  preferred.^  Second, 
those  preferred  stocks  which  were  listed  on  the  New  York 

3  The  low  redemption  price  of  Kresge  (no)  undoubtedly  influenced 
the  selling  price. 


74  THE  CAPITALIZATION  OF  GOODWILL 

Stock  Exchange  sold  usually  at  a  relatively  higher  price 
than  those  on  the  smaller  exchanges. 

The  failure  of  the  preferred  stocks  in  the  agricultural 
implement  companies  was  noted  in  the  preceding  chapter. 
It  is  enough  to  say  that  three  of  the  six  companies  analyzed 
were  unable  to  pay  all  their  preferred  dividends.  With  the 
exception  of  Maxwell  and  Loose-Wiles,  there  were  few  other 
companies  which  were  unable  to  meet  the  preferred  dividend 
requirements.  Thus,  on  the  whole,  as  far  as  dividends 
were  concerned,  these  new  industrial  preferred  stocks  were 
successful.  Furthermore,  these  stocks  rose  in  value  from 
year  to  year.  Just  what  where  the  most  important  factors 
in  the  fluctuations  of  the  preferred  stocks  is  a  difficult 
question.  The  factors,  however,  which  might  have  been 
expected  to  have  had  an  immediate  influence  on  the  price 
of  the  preferred  stock  were  the  tangible  assets,  the  earning 
power,  and  the  price  of  the  common  stock.  Of  course,  the 
tangible  assets  and  the  earning  power  in  any  year  had  less 
influence  on  the  prices  of  the  stocks  for  that  year  from  the 
fact  that  the  reports  were  not  published  until  the  end  of 
the  year.  Furthermore,  the  actual  effect  on  the  prices  of 
preferred  stock  was  much  less  considerable  than  might 
have  been  expected.  The  prices  of  preferred  stocks  seem 
to  have  been  influenced  more  by  the  prices  of  the  common 
stocks  than  by  any  other  factor.  The  records  of  Kresge, 
Woolworth,  Goodrich,  Goodyear,  and  Underwood  Type- 
writer are  but  a  few  of  the  many  cases  which  illustrate  this 
point. 

The  banker  was  naturally  interested  in  the  preferred 
stock  in  so  far  as  his  reputation  depended  to  a  large  extent 
upon  the  success  of  the  preferred  issue.  The  actual  holder 
of  the  preferred  stock  was  the  one  most  vitally  interested. 
The  banker  cared  chiefly  about  the  safety  of  the  yearly 
dividend  and  the  absence  of  any  material  decline  in  the 
price  of  the  stock.  But  the  holder  might  have  anticipated 
in  addition  an  actual  rise  in  value  or  an  early  redemption. 
On  the  whole,  bankers  and  preferred  stock  holders  were 
satisfied.     With  the  exception  of  one  industry  and  certain 


SUCCESS  OF  THE  NEW  INDUSTRIAL  CORPORATIONS        75 

Other  sporadic  cases,  the  preferred  stocks  paid  their  regular 
quarterly  dividends  and  rose  steadily  in  value,  as  shown  in 
the  following  table  :^ 


Companies 

Deere 

Case 

Rumely 

Emerson- 

Brantingham 
B.  F.  Goodrich . 

Goodyear 

Studebaker .... 
Willys-Overland 

Maxwell 

Woolworth .... 

Kresge 

Acme 

Jewel 


1912 


1913 


191S 


1916 


1917 


100-  99 
loi-  99 
103-  98 

102-  98 
109-105 

98-  90 
loi-  99 

I 18-109 
105-100 


100-  91 
103-  90 
100-  33 

loi-  91 

105-  73 

105-  97 

93-  64 

99-  80 

35-  18 

I 15-109 

102-  96 


99-  91 
95-  80 
40-  21 

76-  72 

95-  79 
102-  92 

92-  70 

96-  90 
48-  22 

118-112 
105-  99 


99-  85 
90-  74 
18-    2 


114-  95 
I 15-100 
119-91 

115-  95 
104-  43 
124-115 
I 12-104 


99-  89 
90-  82 

43-  30 


116-110 

I 14-108 

117-  94 
93-  65 

126-123 
12-  10 
98-  93 

I 13-104 


loi-  91 

88-75 
37-  19 


112-  9i« 
108-  92 
108-  85 
100-  92 

74-  49 
126-113 

113-  83 
96-  92 

112-  90 


It  would  appear  that  the  values  of  the  preferred  stocks 
should  have  borne  some  definite  relation  to  the  values  of  the 
tangible  assets  behind  them.  Even  if  such  a  relation 
existed,  it  would  have  been  complicated  somewhat  by  the 
redemption  values  of  these  stocks.  For  example,  Goodyear 
preferred  stock,  which  up  to  191 5  was  much  better  secured 
than  B.  F.  Goodrich  preferred  stock,  never  sold  above  $105, 
whereas  B.  F.  Goodrich  sold  at  $109.  The  redemption 
value  of  Goodyear  preferred  was  $115  while  that  of  B.  F. 
Goodrich  preferred  was  $125.^ 

No  very  definite  relation  between  the  prices  of  these 
stocks  and  their  safety  coefficients,  that  is,  ratios  of  tangible 
assets  to  the  preferred  stocks,  seems  to  exist.  The  earnings 
of  the  various  companies  must  be  taken  into  consideration. 
The  prices  of  the  agricultural  implement  preferred  stocks 
reflected  the  general  instability  in  the  industry.  The  chain 
store  preferred  stocks  were  apparently  the  most  stable 
investments. 


*  These  prices  were  obtained  from  the  Annalist  and  from  Investors' 
Manuals. 

*  Ex-dividend. 

^  See  appendix  ii. 


76 


THE  CAPITALIZATION  OF  GOODWILL 


The  ratios  of  the  tangible  assets  to  the  preferred  stocks 
were  as  follows :® 


Companies 

Deere 

J.  F.  Case 

Rumely 

Moline 

Emerson-Brantingham 

B.  F.  Goodrich 

Goodyear 

Studebaker 

Willys-Overland 

Maxwell 

Woolworth 

Kresge 

McCrory 

Acme 

Jewel 


1912 


1913 


1914 


1915 


1916 


1. 19 
2.20 

145 

4.80 
1.80 


I. GO 
1.22 


1.09 
1.75 
1-59 
2.19 
1.49 

2.40 
2.18 


1.22 
1.50 


1.20 
1.84 

{') 
2.20 

.96 

2.68 
2.19 

3-93 
1.40 
1.70 


1.25 
1.89 
1.03 
2.22 
1.46 
1.08 
2.80 
3.06 
3.96 
4.61 
1.60 
2.25 
1.80 


1.29 

1-93 
.99 
2.23 
1.46 
1.60 
1.25 
349 
4-85 
5.35 
1.86 

340 
1.95 
1.05 
149 


1-25 

1.98 
.96 
2.26 
1-53 
1.73 
1-55 
2.95 
4-38 
3.10 
2. II 
4.21 
2.19 
1.49 
1.74 


A  very  much  more  definite  relation  between  the  earnings 
on  the  common  stocks  and  the  market  prices  of  those  stocks 
is  clearly  discernible.  The  following  tables  show  how 
closely  market  prices  and  earnings  were  related.  The  net 
earning  on  the  common  stocks  were  as  follows  :^ 


Companies 


1912 

1913 

I9I4 

I9I5 

I9I6 

Per  cent 

Per  cent 

Per  cent 

Per  cent 

Per  cent 

12 

8 

—  3 

3 

19 

17 

6 

2 

14 

10 

13 

10 

-36 

-165 

— 

10 

2/10 

9/10 

4 

— 

3 

-  9 

-5 

-5 

5 

I 

5 

6 

12 

125 

74 

59 

58 

36 

6 

4 

14 

27 

26 

— 

— 

— 

53 

40 

— 

— 

12 

16 

21 

12 

15 

20 

23 

20 

9 

II 

II 

13 

16 

7 



z 

z 

z 

10 
14 

I9I7 


Deere 

Case 

Rumely 

Moline 

Emerson-Brantingham . 

B.  F.  Goodrich 

Goodyear 

Studebaker 

Willys-Overland 

Maxwell 

Woolworth 

Kresge 

McCrory 

Acme 

Jewel 


Per  cent 

14 
18 

-36 
10 

8/10 

14 
62 

9 
21 

31 
17 
17 
5 
II 

25 


•  These  figures  were  calculated  from  data  in  Moody's  Manuals  of 
Industrials. 

*  Reorganization. 

'These  figures  were  obtained  from  data  in  Moody's  Manuals  of 
Industrials. 


SUCCESS  OF  THE  NEW  INDUSTRIAL  CORPORATIONS        77 

The  market   prices  of  these   common   stocks  were  as 
follows  :^ 


Companies 


1912 


1913 


1914 


1916 


Deere 

Emerson- 

Brantingham 
B.  F.  Goodrich. 

Goodyear 

Studebaker .... 
Willys-Overland 

Maxwell 

Woolworth .... 

Kresge 

Acme 

Jewel 


loi-  89 

n-  65 

86-  60 


49-  30 
72-67 

118-  76 
89-  47 


92-  13 

69-  22 
68-  15 

443-279 

36-  15 

75-  50 

I-     5 

112-  81 

83-58 


18-     6 


28-  19 

250-150 

36-  20 

91-  58 

3-  16 

103-  89 

105-  81 


14-78 


80-  24 
340-191 
195-  35 
268-  84 

92-  15 
120-  90 
260-  99 


21-  14 


80-^57 

167-100 
81-  35 
99-  44 

141-118 

16-   10' 

96-  67 
69-  51 


18-    7 

14-  12 

61-  32 

281-136 

no-  79 

38-  24 

61-  43 

I 15-100 

13-   IOC 
78-  31 
58-   52 


8  These  prices  were  obtained  from  the  Annalist  and  from  Investors' 
Manuals. 

"  Value  of  common  reduced  to  a  par  of  $10. 


CHAPTER  VIII 

A  Social  Estimate  of  the  New  Industrial 
Corporations 

It  Is  a  well  known  fact  that  the  larger  a  business  becomes, 
the  greater  is  the  need  of  some  form  of  finance  by  flotation. 
Small  undertakings  can  finance  themselves  satisfactorily 
through  the  commercial  banks  and  from  private  sources, 
whereas  large  undertakings  usually  must  have  recourse 
to  the  public  sale  of  securities.  Perhaps  because  stocks 
and  bonds  are  long  time  instruments  they  were  once  con- 
sidered proper  only  for  quasi-governmental  enterprises, 
namely,  railroads,  public  utilities,  etc.  As  industrial  enter- 
prises have  increased  in  size  on  account  of  the  advantages 
of  large  scale  production,  the  method  of  flotation  has  been 
employed  more  and  more  by  industrial  corporations. 
However,  it  is  doubtful  whether  it  is  socially  desirable 
that  some  of  the  businesses  quoted  on  the  exchange  today 
should  be  there.  It  would  have  been,  perhaps,  to  the 
interest  of  all  concerned — investors,  the  bankers,  and  the 
owners — had  the  stocks  of  such  businesses  not  been  sold 
on  the  stock  exchange. 

One  of  the  most  important  functions  claimed  for  the 
stock  exchange  grows  out  of  the  speculator's  assumption 
of  risks  and  the  resultant  stabilizing  effect  on  the  stocks 
of  companies  with  great  fluctuations  in  earnings.  There  is, 
however,  a  limit  to  this  doctrine.  It  is  uneconomic  for 
a  business  which  could  have  been  financed  from  private 
sources  to  impose  large  risks  on  the  market,  which  is 
always  best  off  when  the  fluctuations  in  it  are  small.  The 
speculator,  who  is  often  as  much  gambler  as  student,  is 
thus  tempted  to  assume  responsibilities  which  could  better 
have  been  undertaken  by  the  men  who  control  the  business 
of  the  corporation.  Furthermore,  instability  in  the  earnings 
of  an  industrial  corporation  that  affects  only  the  common 

78 


SOCIAL  ESTIMATE  OF  NEW  INDUSTRIAL  CORPORATIONS        79 

stock  is  far  less  dangerous  and  much  less  important  than 
an  instability  so  great  that  the  safety  of  the  preferred  stock 
is  threatened.  Preferred  stocks,  generally  speaking,  are 
reasonably  safe  investments;  and  a  business  which  does 
not  anticipate  paying  its  preferred  dividends  regularly  and 
easily  has  no  right  to  sell  such  securities  to  the  public. 
The  greater  the  stability  of  a  business,  the  more  justification 
there  is  for  shifting  its  risks  to  the  market. 

It  may  generally  be  said  that  the  larger  a  business  is,  the 
greater  will  be  its  stability.  However,  size,  as  it  is  well 
known,  is  by  no  means  the  only  element  in  stability.  It 
was  shown  in  the  foregoing  chapter  that  those  businesses 
which  catered  to  but  a  single  demand  and  which  depended 
upon  the  supply  of  only  one  or  two  raw  materials,  were  the 
first  to  encounter  temporary  difficulties  with  disastrous 
results.  The  experience  of  the  B.  F.  Goodrich  Company,  of 
the  Brown  Shoe  Company,  and  of  the  Cluett  Peabody  Co. 
furnish  good  examples.^  A  company  which  finds  the  prices 
of  its  raw  materials  rising  often  cannot  recuperate  by  an 
immediately  increased  price  for  the  finished  product.  The 
customary  price,  which  the  Cluett  Peabody  Co.  or  the 
Loose  Wiles  Biscuit  Co.  had  to  maintain,  could  not  imme- 
diately be  altered  when  the  price  of  linen  or  the  price  of 
sugar  increased  rapidly.  Notoriously  unstable  businesses 
like  the  agricultural  implement  companies  should  never 
have  been  brought  into  the  market.  On  the  other  hand 
the  most  successful  companies  have  been  those  which 
catered  to  varied  demands,  that  is,  Woolworth,  Kresge, 
Sears  Roebuck.^  The  successful  chain  store  company  was 
particularly  suited  to  flotation.  The  difficulty  with  the 
May  Department  Stores  lay  in  the  fact  that  the  chain  was 
so  small  that  a  local  difficulty  affected  the  success  of  the 
chain  to  a  large  degree.  Companies  with  trade  names 
that  appeal  to  the  popular  imagination  were  thought  by 
some  bankers  to  be  especially  suited  to  public  flotation. 

One  economic  question  which  seems  to  have  been  par- 


1  See  appendix  ii. 

2  See  appendix  iv. 


80  THE  CAPITALIZATION  OF  GOODWILL 

ticularly  interesting  to  the  bankers  was  concerned  with  the 
advantages  of  combining  businesses  as  a  basis  of  flotation. 
It  must  be  understood  that  a  combination,  such  as  those  of 
Woolworth  or  the  May  Department  Stores,  was  very 
different  from  a  combination  Hke  that  of  the  B,  F.  Goodrich 
Company  and  the  Diamond  Rubber  Co.  In  the  cases  of 
Woolworth  and  May,  businesses  were  combined  which  did 
not  compete  with  each  other  and  which  were  but  slightly 
affected  by  the  combination.  There  was  a  single  manage- 
ment, whereas  before  incorporation  there  had  been  a  few 
independent  businesses.  When  B.  F.  Goodrich  and  the  Dia- 
mond Rubber  Co.  were  combined,  the  healthful  competition 
which  had  stimulated  salesmanship  and  the  trade  name  of 
the  Diamond  Rubber  Co.  were  lost.  When  the  banker  who 
had  brought  about  the  combination  of  these  two  companies 
was  to  float  a  later  combination  of  the  same  kind,  he  feared 
the  same  difficulties  which  he  had  encountered  in  the  B. 
F.  Goodrich  Company.  As  Dewing  has  shown,  few  of  the 
industrial  combinations  obtained  a  sufficient  control  of  the 
trade  to  command  prosperity.^ 

The  financial  exigencies  which  were  responsible  for  the 
incorporation  or  reincorporation  of  these  companies  were 
classified,  and  described  at  length  in  a  former  chapter."* 
The  owners,  who  invoked  the  financial  aid  of  a  flotation, 
and  the  investors  and  the  bankers,  whose  security  holdings 
were  the  results  of  these  financial  needs,  naturally  took  great 
interest  in  the  purposes  of  these  flotations  and  had  definite 
ideas  as  to  how  this  new  capital  would  be  of  advantage 
from  their  own  particular  points  of  view.  Certainly  the 
social  estimate  of  the  desirability  of  the  employment  of 
these  large  amounts  of  capital  must  take  into  consideration 
the  interests  of  these  agents  in  economic  production,  but 
it  will  take  into  account  other  interests  as  well.  The 
personal  motives  of  the  owner  are  not  hard  to  understand. 
Here  was  a  great  business  which  he  had  built  up,  in  most 
cases,  slowly  and  laboriously.  As  he  was  growing  older 
he  felt  that  it  was  desirable  to  sell  stock  to  those  who  were 

3  Dewing,  Corporate  Promotions  and  Reorganizations,  p.  565. 
^  Chapter  iii. 


SOCIAL  ESTIMATE  OF  NEW  INDUSTRIAL  CORPORATIONS        8 1 

anxious  to  get  it,  and  thereupon  he  withdrew  his  invested 
capital.  He  did  not  want  all  his  eggs  in  one  basket,  for  if 
danger  befell  his  business  his  declining  years  might  be 
threatened  with  disaster.  Of  course,  from  an  economic 
point  of  view,  much  depended  upon  what  other  baskets 
he  chose  for  the  eggs.  Society  is  interested  in  the  economic 
employment  of  capital.  One  of  the  most  important  func- 
tions of  a  bank  is  the  transfer  of  capital  from  those  who  own 
it,  but  who  do  not  know  how  to  use  it,  to  those  who  need 
it  and  know  how  to  use  it.  Assuming  that  the  owner  who 
withdrew  his  capital  was  as  wise  in  appraising  other  ven- 
tures as  he  had  been  in  the  promotion  of  his  own  and  that 
his  business  experience  through  many  years  had  made  him 
even  keener  and  more  efficient,  there  is  reason  to  believe 
that  the  capital  which  he  withdrew  was  reinvested  econom- 
ically. However,  if,  with  advancing  age,  caution  and  con- 
servatism suggested  the  reinvestment  of  the  capital  with- 
drawn in  government  bonds,  it  is  doubtful  whether  the 
effects  of  such  a  flotation  were  economically  beneficial. 

Those  businesses  which  were  incorporated  in  order  to 
obtain  working  capital  for  expansion  made,  perhaps,  the 
most  legitimate  use  of  corporation  finance  from  an  economic 
point  of  view.  That  this  was  recognized  by  the  owners  was 
shown  in  practically  every  prospectus  which  made  a  definite 
and  open  avowal  of  the  purpose  of  procuring  working 
capital  for  expansion.  Expansion  by  means  of  the  public 
sale  of  securities  is  a  recognized  method  of  corporation 
finance,  but  the  question  naturally  arises  as  to  whether 
many  of  these  new  industrials  really  needed  or  were  justified 
economically  in  their  use  of  the  methods  of  corporation 
finance  to  obtain  this  capital.  It  was  explained  earlier  in 
the  chapter  that  those  businesses  which  were  small  and 
which  were  lacking  in  stability  had  less  justification  for 
throwing  risks  on  the  stock  market  than  those  which  were 
larger  and  more  stable.  Furthermore,  the  smaller  busi- 
nesses should  have  been  able  to  finance  themselves  in  the 
usual  way  through  the  commercial  banks  if  they  had  good 
credit.     The  great  expenses  of  the  flotations  must  also  be 

6 


82  THE  CAPITALIZATION  OF  GOODWILL 

considered.  There  is  one  other  consideration  of  interest 
with  regard  to  those  businesses  which  obtained  capital  for 
expansion.  Where  a  business  borrowed  money  in  the 
market  instead  of  in  the  bank,  or  when  it  Hquidated  its 
outstanding  liabilities  with  the  borrowed  capital,  its  credit 
was  perhaps  increased  with  the  bank.  A  further  issue  of 
securities  in  a  market  which  was  acquainted  with  the 
company  was  also  usually  a  possibility.  Thus,  the  question 
arises  as  to  whether  these  flotations  did  not  allow  and 
whether  they  might  have  even  encouraged  a  too  rapid 
expansion.  The  charter  provisions  with  regard  to  the 
preferred  stock^  and  with  respect  to  borrowing  in  general 
as  well  as  the  publicity  afforded  by  the  annual  statements 
were  the  most  effective  restrictions  on  the  possible  tendency 
towards  a  too  rapid  expansion.  It  was  a  common  belief 
that  the  banker,  who  was  usually  a  director,  actuated  by 
self-interest,  wisdom,  and  conservatism,  furnished  a  check 
on  any  policy  of  unwarranted  expansion.  As  a  matter  of 
fact,  the  bankers  usually  had  little  control  after  the  flotation 
of  the  stock.  The  charter  provisions  were  their  only 
weapons  and  safeguards.  The  banker  who  financed  a 
business  before  its  public  sale  had  in  many  respects  a  much 
more  effective  control  of  it  than  he  could  have  after  if  it 
had  been  financed  by  the  marketing  of  its  stock. 

^  Given  in  full  in  chapter  vi. 


APPENDIX  I 
Introduction 

The  four  industries  in  which  the  capitalization  of  in- 
dustrial goodwill  has  been  most  noteworthy  are  the  farm 
implement  industry,  the  rubber  tire  industry,  the  auto- 
mobile industry,  and  the  chain  stores.  For  this  reason 
brief  analyses  of  the  rise,  spread,  and  success  of  stock 
flotations  in  these  industries  have  been  prepared.  These 
analyses  furnished  material  for  a  number  of  the  conclusions 
reached  in  the  foregoing  chapters.  The  data  for  these 
analyses  were  obtained  from  Moody's  and  Poor's  Manuals 
of  Industrials,  the  Annalist,  Investors'  Manuals,  and  from 
other  original  sources. 

Although  some  knowledge  of  accounting  is  indispensable 
for  a  thorough  comprehension  of  these  analyses,  only  a  few 
terms  need  be  explained  for  the  general  reader. 

By  "Sales"  is  usually  meant  "Net  Sales,"  i.e.,  "Gross 
Sales,"  with  deductions  for  "Outgoing  Freight,"  "Dis- 
counts," and  "Allowances." 

By  "Investment"  is  meant  "Capital  Stock,"  "Bonds," 
and  "Surplus,"  with  deductions  for  "Goodwill"  and  "Out- 
side Investments."  "Short  Term  Notes"  would  have  been 
included  if  their  duration  could  have  been  ascertained. 

By  "Tangible  Assets"  is  meant  "Capital  Stock"  and 
"Surplus,"  with  deductions  for  "Goodwill." 

By  "Profit"  is  meant  the  accountant's  "Gross  Profit," 
i.e.,  profit  and  interest.  In  some  places  "Profit"  refers 
to  the  accountant's  "Net  Profit,"  i.e.,  gross  profit  with 
bond  interest  deducted  (as  in  the  profit  earned  on  the 
common  stock). 

The  Farm  Implement  Stock  Flotations 

I.  The  Reasons  for  the  Preferred  Stock  Flotations 

The  M.  Rumely  Co.,  together  with  the  companies  which 
it  absorbed    in   191 1   (the  Gaar  Scott  Co.,  the  Advance 

83 


84  THE   CAPITALIZATION   OF   GOODWILL 

Thresher  Co.,  and  the  J.  I.  Case  Threshing  Machine  Co.), 
were  the  most  important  threshing  companies  in  the  in- 
dustry. These  large  thresher  companies  stated  at  the 
time  of  their  flotations  in  191 1  and  1912  that  they  desired 
to  develop  the  manufacture  of  other  kinds  of  farm  imple- 
ments, particularly  tractors  and  portable  engines.  The 
Emerson-Bran tingham  Co.,  which  had  confined  its  output 
to  "walking,  riding,  and  engine  plows,  disc  plows,  harrows, 
pulverisers,  seeders,  planters,  middle  breakers,  cultivators, 
listers,  alfalfa  renovators,  stalk  cutters,  mowers,  and  rakes," 
acquired  two  new  platits  in  order  to  develop  a  business  in 
"tractors,  threshers,  hay  stackers,  hay  presses,  corn  shellers, 
etc."  The  Moline  Plow  Co.,  which  had  manufactured 
wagons  and  plows,  acquired  by  means  of  its  second  preferred 
stock  the  Adriance,  Piatt  and  Company,  a  large  binder 
plant.  The  John  Deere  Plow  Co.,  which  had  always  been 
one  of  the  most  important  plow  manufacturing  companies, 
developed  under  the  name  of  Deere  and  Co.  into  the  most 
important  independent  "full  line"  company. 

In  the  Report  of  the  Bureau  of  Corporations  (March 
1 913)  on  the  International  Harvester  Company,  it  was 
stated  (page  xx)  that  since  the  organization  of  the  Inter- 
national Harvester  Company  in  1902  new  competition  had 
begun  to  appear,  "especially  from  certain  large  plow  and 
tillage-implement  makers,  whose  fields  have  been  invaded 
by  the  combination,  and  who  likewise  have  arranged  to 
estabHsh  a  'full  line' — that  is,  a  large  assortment  of  the 
chief  kinds  of  farm  implements.  This  new  competition  is 
apparently  of  great  significance.  However,  in  1911  the 
International  Harvester  Company  still  had  about  80  per 
cent  of  the  production  of  binders,  78  per  cent  of  the  pro- 
duction of  mowers,  and  72  per  cent  of  the  production  of 
rakes." 

Apparently  the  flotations  of  preferred  stock  by  the  inde- 
pendent companies  represented  the  means  by  which  they 
were  enabled  to  develop  "full  lines"  or,  at  least,  new  fines. 
The  International  Harvester  Co.  had  invaded  their  fields, 
and  they  desired  to  wage  offensive  warfare. 


APPENDIX  I  85 

In  addition  to  this  motive,  there  was  probably  another 
which  influenced  the  threshing  machine  companies  (J.  I. 
Case  and  M.  Rumely)  to  issue  preferred  stock.  Parts  of 
their  preferred  stocks  were  used  to  wipe  off  bonded  in- 
debtedness and  other  liabiUties.  This  was  particularly 
true  of  the  J.  I.  Case  preferred  stock,  which  was  to  be 
used  "  to  redeem  and  cancel  all  the  outstanding  bonded  debt 
($2,300,000),  and  along  with  bills  receivable  ($9,405,643)  to 
retire  the  bills  payable  ($5,425,000)  as  well  as  for  increases 
in  plant  and  manufacturing  facilities  ($1,200,000)."  The 
M.  Rumely  Company  had  $1,000,000  of  bonded  indebted- 
ness which  was  wiped  off  by  the  preferred  issue.  The 
threshing  machine  was  an  expensive  machine,  and  was 
usually  bought  on  credit  and  paid  for  by  installments. 
Thus,  a  threshing  machine  company  had  great  difficulty 
in  financing  itself  inasmuch  as  it  had  to  extend  so  much 
credit.  It  should  be  noted,  furthermore,  that  the  Moline 
Plow  Co.  also  desired  to  retire  its  floating  indebtedness. 

2.  Case,  Deere,  Rumely,  Emerson-Brantingham,  and 
Moline  Before  igi2 

The  preferred  stock  flotations  of  the  farm  implement 
companies  occurred  in  191 1  and  191 2.  A  comparison  of  the 
accounts  of  the  five  independent  companies  in  19 10  and 
191 1  will  serve  to  estimate  their  success  before  their  re- 
incorporation. 

1910 

Ratio  of  Gross  Profits       Ratio  of  Net  Profits 
Companies  to  Gross  Sales  (%)  to  Gross  Sales  (%) 

Deere 13**  I2« 

J.  I.  Case 16  12 

M.  Rumely 10  5 

191 1 

Deere I3"  ^2 

J.  I.  Case 18  12 

M.  Rumely I5  '3 

Emerson-Brantingham —  lo      


«  Estimated. 


86 


THE   CAPITALIZATION   OF   GOODWILL 


3.  The  Success  of  the  Farm  Implement  Flotations 

The  earnings  of  these  companies  on  their  investments 
between  19 12  and  191 7  show  that  they  failed  to  obtain 
the  success  they  anticipated  in  191 1  and  1912.  Their 
reports,  however,  were  better  on  the  whole  in  191 7  than  in 
the  previous  years. 

The  profits  on  investment  were  as  follows : 

Percentage  of  Profit  Earned  on  Investment 


Companies 

1912 

1913 

1914 

191S 

1916 

1917 

Rumely 

10 

10 
9 

19(b) 

7 

7 

12 

8 

Loss 

4 
6 
6 

.6 
3 
9 
9 

4 

I 

4 

10 

8 

5 

Emerson-Brantingham .... 
Moline 

3 
10 

Deere 

12 

Case 

13 

4.  The  Preferred  Stock  of  the  Farm  Implement  Companies 

The  relations  of  the  preferred  stocks  to  the  tangible 
assets  for  the  five  companies  were  as  follows : 

Tangible  Assets  Divided  by  the  Preferred  Stock 


1912 

1913 

1914 

191S 

1916 

1. 19 

1.09 

1.20 

1.25 

1.29 

1.75 

1.84 

1.89 

1.93 

2.20 

1-59 

(c) 

1.03 

.99 

— 

2.19 

2.20 

2.22 

2.23 

1.45 

1.49 

1.45 

1.46 

1.46 

1917 


Deere 

J.  I.  Case 

Rumely 

Moline^ 

Emerson-Brantingham 


1.25 
1.98 
.96 
2.26 
1-53 


The  preferred  stock  issues,  thus,  were  conservative. 
Apparently  no  great  amounts  of  money  were  put  back  in  the 
business  as  the  increases  in  the  foregoing  percentages  were 
not  great.  However,  the  preferred  stocks  were  not  retired 
(i.e.,  amortized)  so  generally  in  these  companies  as  in  the 
case  of  most  of  the  other  industrials. 

The  prices  of  these  preferred  stocks  were  as  follows:^ 

^  Loss. 

*  Reorganization. 

1  Reports  do  not  show  exact  amount  of  goodwill. 

*  Fractions  omitted. 


APPENDIX  I 


87 


Deere 

J.  I.  Case 

Rumely 

Emerson- 

Brantingham 


Hig 


;h-Lo\i 


100-99 
101-99 
103-98 

102-98 


Hig 


:h-Lo\ 


100-91 
103-90 
100-33 

IOI-91 


Hig 


■h-Lov 


99-91 
95-80 
40-21 

76-72 


Hig! 


■h-Lo\ 


99-86 
90-74 
18-  2 


1Q16, 
High-Low 


99-89 
90-82 
43-30 


191 7' 
Hign-Low 


101-91 

88-75 
37-19 


The  ratios  of  these  preferred  stocks  to  the  tangible  assets, 
however,  bore  no  definite  relation  to  the  market  prices  of 
the  stocks  when  the  earnings  of  the  companies  fell  off. 
The  preferred  stock  of  Deere  held  up  best,  and  that  of  Case 
held  up  fairly  well,  but  the  industry's  bad  year  of  191 4 
seriously  affected  the  market  values  of  most  all  of  these 
stocks. 

Case  and  Deere  have  always  paid  the  7  per  cent  preferred 
stock  dividends,  but  Rumely  preferred  paid  nothing  in 
1914  and  Emerson-Brantingham  paid  only  sJ  per  cent. 
The  preferred  dividends  of  these  companies  were  as  follows : 


1912 

1913 

1914 

1915 

1916 

1917 

Deere 

7 
7 
7 
7 

7 

7 

h 

7 
7 

7 

7 

7 
7 

7 
0 

7 

7 

7 
0 

7 

7 

Case 

Rumely 

Moline 

7 
0 

Emerson-Brantingham 

5.  The  Common  Stocks 

The  common  stocks  of  most  of  these  farm  implement 
companies  were  not  traded  in  extensively  on  the  stock 
exchanges.  The  prices  of  the  Deere  and  Emerson-Brant- 
ingham common  stocks  were  as  follows: 


1912, 

High-Low 


1913 
High  - 


Low 


1914. 
High-Low 


1915. 
Hign-Low 


1916, 
High-Low 


1017. 
High-Low 


Deere 

Emerson- 
Brantingham 


101-89 
77-65 


92-13 
69-22 


18-6 


14-7/8 


21-14 


18-  7 
14-12 


The  earnings  of  these  companies  on  their  common  stocks 
throw  light  on  the  low  prices  of  those  listed  and  explain 


88 


THE  CAPITALIZATION  OF  GOODWILL 


why  they  were  so  little  traded  in.     The  percentages  earned 
on  the  common  stocks  were  as  follows: 


I9I2 

1913 

1914 

1915 

1916 

12 

-8 

-3 

3 

19 

17 

6 

2 

14 

10 



3 

-9 

-5 

-5 

13 

10 

36 

— 

-165 



10 

2 

I 

4 

1917 


Deere 

Case 

Emerson-Brantingham 

Rumely 

Moline 


14 

18 

I 

-36 


APPENDIX   II 


The  Rubber  Tire  Stock  Flotations 

I.  The  Rubber  Tire  Industry  Before  the  Preferred  Stock 
Flotations  in  igi2 

The  rubber  tire  industry  is  an  industry  of  comparatively 
recent  growth,  and  has  developed  simultaneously  with  the 
automobile  industry.  The  development  of  the  automobile 
would  have  been  practically  impossible  had  it  not  been  for 
the  pneumatic  rubber  tire.  The  great  expansion  in  the 
rubber  industry,  furthermore,  has  resulted  from  the  demand 
for  automobile  tires. 

In  the  Census  of  Manufacturing  of  1914,  figures  for  the 
tire  industry  were  first  given  separately.  The  development 
of  the  combination  in  this  industry,  the  United  States 
Rubber  Co.,  preceded  this  Census  by  a  number  of  years. 
In  the  report  of  the  Industrial  Commission  of  1901  the 
dominant  position  of  the  United  States  Rubber  Co.  was 
set  forth.  But  the  company  developed  its  business  in 
other  lines,  e.g.,  shoes,  belting,  hose,  etc.  A  comparison 
of  the  figures  in  the  Census  of  1909  with  those  of  the  Census 
of  1914  will  show  that  the  rubber  industry  grew  rapidly  in 
these  five  years  and  that  the  increases  resulted  chiefly 
from  the  development  of  the  tire  industry. 

The  development  in  the  use  of  automobile  tires  in  1909 
and  1 9 10  and  its  effect  on  the  business  of  the  tire  companies 
are  shown  by  the  following  figures  taken  from  the  Fisk 
prospectus : 


Year 

Automobile  Casings 

Automobile  Inner  Tubes 

Bicycle  Tires 

1908 

57.695 

40,960 

84,387 

1909 

78,259 

59,077 

103,085 

I9IO 

96,692 

88,061 

168,990 

I9II 

125,279 

121,584 

207,561 

I912 

221,826 

198,925 

240,623 

89 


90 


THE  CAPITALIZATION  OF  GOODWILL 


In  1902  the  United  States  Rubber  Co.  and  the  Rubber 
Goods  Manufacturing  Co.  controlled  nearly  60  per  cent 
of  the  industry,  but  by  1914  not  much  more  than  one-fourth 
of  the  rubber  manufacturing  business  was  in  the  hands  of 
the  United  States  Rubber  Company.^  In  1914  the  sales 
of  the  United  States  Rubber  Co.  were  about  85  per  cent 
as  great  as  the  combined  sales  of  the  three  largest  companies 
(B.  F.  Goodrich,  Goodyear,  and  Firestone),  while  in  191 7 
this  percentage  was  only  about  67  per  cent.  The  trade 
names  of  the  independent  companies  proved  of  great  value. 

The  United  States  Rubber  Co.,  furthermore,  did  not 
increase  its  sales  from  1910  to  1912,  whereas  the  large 
independent  companies  showed  considerable  increases  prior 
to  1 91 2.  In  the  following  figures  the  sales  of  1910  are  used 
as  a  base : 


Year 

United  States 
Rubber  Co. 

B.  F.  Goodrich 

Goodyear 

Fisk 

IQIO 

100 
105 

95 

100 
106 
192 

100 

139 
264 

100 

I9II 

IQI2 

116 
165 

The  United  States  Rubber  Co.  made  a  somewhat  greater 
margin  of  profit  on  sales  than  the  other  two  companies  for 
which  figures  are  available,  i.e.,  Goodyear  and  Firestone. 


2..  The  Reasons  for  the  Preferred  Stock  Flotations 

The  independents,  B.  F.  Goodrich,  Goodyear,  and  Fisk, 
issued  preferred  stock  apparently  for  the  purpose  of  securing 
funds  for  expansion.  The  Goodyear  prospectus  gives  the 
following  as  the  purpose  of  the  preferred  issue:  ''Of  the 
authorized  issue  of  $5,000,000  Preferred  Stock,  $1,000,000, 
was  issued  to  retire  a  like  amount  of  Preferred  Stock 
formerly  outstanding,  and  the  remaining  $4,000,000  to 
provide  additional  working  capital  to  meet  the  growing 
demands  of  the  business."  The  reason  for  the  B.  F. 
Goodrich  flotations  was  the  desire  for  expansion  through  the 

^The  Rubber  Goods  Manufacturing  Co.  was  controlled  by  the 
United  States  Rubber  Co. 


APPENDIX  II 


91 


purchase  of  the  Diamond  Rubber  Company.  Apparently  the 
promoters  had  no  idea  of  forming  a  combination  in  restraint 
of  trade  or  of  attempting  any  kind  of  monopoly;  the  acquisi- 
tion of  the  Diamond  Rubber  Company  seems  to  have  grown 
out  of  the  desire  to  gain  the  well  recognized  economies  of 
large  scale  production, 

The  entire  proceeds  from  the  preferred  stock  issues  of 
these  companies  were  not  used  in  every  case  for  the  purpose 
of  expansion.  Apparently  the  owners  of  these  companies 
withdraw  a  part  of  their  investment  from  the  business  when 
their  preferred  stock  was  floated. 


3.  The  Sales  of  the  Rubber  Tire  Companies  after  the 
Flotations  of  igi2 

Following  the  flotations  of  19 12,  the  sales  of  the  inde- 
pendent companies  increased  more  rapidly  than  the  sales 
of  the  United  States  Rubber  Co.  In  the  following  table 
the  sales  of  1913  are  used  as  a  base: 


Year 

United  States 
Rubber 

B.  F.  Goodrich 

Goodyear 

Fisk 

IQI-l 

100 
lOI 

138 
191 

100 
121 
140 
180 
221 

100 

94 
III 

194 

100 

IQI4.      

117 

IQiq      

147 

*^    9 

IQI6 

210 

I9I7 

322 

The  sales  of  the  United  States  Rubber  Company  were 
larger  than  those  of  any  of  the  independents,  and  therefore 
the  percentage  of  increase  might  have  been  expected  to  be 
less  rapid  for  the  larger  company. 

4.  The  Profits  of  the  Rubber  Tire  Companies 

The  ratios  of  the  profits  (gross  profits  before  the  deduc- 
tion of  interest)  to  the  sales  were  on  the  average  greater 
for  the  United  States  Rubber  Co.  than  for  the  other  com- 
panies. For  the  five  years  since  incorporation,  the  United 
States  Rubber  Co.  averaged  about  14  per  cent  on  sales, 
Fisk  about  8  per  cent,  and  the  other  companies  about  12 
per  cent.     The  profits  earned  on  sales  were  as  follows: 


92 


THE  CAPITALIZATION  OF  GOODWILL 


Percentage  of  Profit  Earned  on  Sales 


Year 

U.  S.  Rubber 

B.  F.  Goodrich 

Goodyear 

risk 

Firestone 

1909. .  . 

— 

— 

15 

_ 

— 

I9IO... 

18 

— 

15 

— 

— 

I9II... 

12 

— 

10 

— 

8 

I912... 

12 

9 

12 

— 

ID 

I913... 

II 

6 

6 

5 

10 

I914... 

14 

10 

20 

7 

17 

I9I5.-. 

15 

21 

14 

10 

17 

1916.. . 

13 

13 

II 

8 

13 

1917... 

18 

13 

13 

12 

8 

The  gross  profits  (i.e.,  profits  and  interest)  on  the  invest- 
ments for  these  companies  were  as  follows:^ 


Percentage  of  Profit  Earned  on  Investments  ^ 


Year 

B.  F.  Goodrich 

Goodyear 

Fisk 

I9IO 

I9II 

I912 

I913 

I914 

I915 

I916 

I917 

7 
16 
36 
24 
26 

72 
31 
64 
17 
29 
29 
36 
41 

9 
15 
29 

19 
21 

Goodyear  averaged  more  than  30  per  cent,  B.  F.  Good- 
rich about  22  per  cent,  and  Fisk,  18  per  cent  between 
1912  and  1917. 

5.  The  Preferred  Stocks 

The  equity  in  the  preferred  stocks  of  B.  F.  Goodrich 
and  Goodyear,  i.e.,  the  preferred  stock  divided  into  the 
tangible  assets  was  as  follows: 

Year  B.  F.  Gooodrich  Goodyear 

I9IO —  4.58 

I9II —  4.10 

I912 —  4.80 

I913 —  2.40 

1914 96  2.68 

I915 1.08  2.80 

I916 1.60  1.25 

1917 1.73  1-55 

'  The  investment  of  the  United  States  Rubber  Co,  was  difficult  to 
determine  because  the  amount  of  "goodwill"  is  not  stated  on  the 
balance  sheet. 

^  Profit  and  Interest  on  Investment. 


APPENDIX  II 


93 


The  Goodyear  preferred  stock  was  the  safest  because  of 
the  absence  of  water,  but  the  redemption  values  were  such 
that  the  high  points  for  Goodyear  and  B.  F.  Goodrich  were 
practically  the  same,  as  shown  by  the  following  figures: 


1911 

1912 

»9i3 

1914 

1915 

1916 

1917 

B.  F.  Good- 

rich   

— 

109-105 

105-  73 

95-79 

114-  95 

116-110 

112-91* 

Goodyear.  . 

— 

105-  97 

102-92 

I 15-100 

— 

108-92 

Firestone.  . 

— 

— 

108-103 

— 

113-110 

— 

109-97 

Fisk 

— 

— 

— 

— 

108^ 

— 

United 

States 

Rubber 

Co 

I I 5-1 04 

I 16-105 

109-  98 

104-95 

IIO-IOI 

I 15-106 

1 14-91 

6.  The  Common  Stocks 

The  earnings  on  the  common  stocks  of  these  companies 
were  as  follows : 


Percentage  Earned  on  the  Common  Stocks 


Year 

United  States 
Rubber  Co. 

B.  F.  Goodrich 

Goodyear 

Fisk 

IQIO          

10 

4 

6 

10 

8 

9 

15 

29 

5 

I 

5 

6 

12 

14 

151 

53 
125 

74 

5? 

58 

36 
62 

— 

TQII       

— 

TQT2       

— 

TQI'l 

2 

I9I4 

TQI^ 

xl 

TQI6 

16 

I9I7 

33 

Goodyear  showed  the  largest  earnings  because  of  the 
absence  of  "goodwill";  the  United  States  Rubber  Co.  and 
Fisk  showed  about  the  same  earnings  on  the  common 
stock;  B.  F.  Goodrich  showed  the  least  because  of  the 
large  amount  of  "goodwill."  These  facts  are  reflected 
somewhat  in  the  prices  of  the  common  stocks. 

«  Ex-dividend. 

^  At  some  closing  during  year. 


94  THE  CAPITALIZATION  OF  GOODWILL 

Prices  of  Common  Stock 


1911, 

High- 
Low 

1912, 
High- 
Low 

Low 

High- 
Low 

H?gt 
Low 

1916, 

High- 
Low 

H?gh- 
Low 

B.  F.  Goodrich. 

Goodyear 

Firestone 

Fisk 

48-30 

86-60 
67-45 

68-  15 

443-279 
360-122 

69-  51 

28-   19 
250-150 

63-  44 

80-  24 
340-191 
804-365 
126-   60 

74-  44 

80-57 
70-47 

61-  32 
281-136 

150-  97 

U.    S.    Rubber 
Co. 

67-  45 

APPENDIX  III 

The  Automobile  Stock  Flotations 
I.  The  Development  of  the  Automobile  Industry 

The  automobile  industry  increased  more  rapidly  in  size 
and  importance  between  1904  and  1909  than  any  other 
industry.  From  an  industry  of  almost  negligible  impor- 
tance in  1900,  it  became  one  of  the  nine  most  important 
industries  in  the  Census  of  191 4 — with  products  valued 
at  over  $500,000,000.  Coincident  with  the  great  increases 
in  the  size  of  the  rubber  tire  industry  between  1908  and 
191 1 ,  the  automobile  industry  also  progressed  rapidly.  The 
following  figures,  which  are  probably  not  entirely  accurate, 
show  the  development  of  the  industry  -} 

Year  No.  of  Cars  Produced 

1898 200 

1900 2,000 

1902 9,000 

1904 20,000 

1906 39.000 

1908 55,000 

1910 180,000 

1912 300,000 

1914 560,000 

1916 1,300,000 

Naturally  a  rapidly  expanding  industry,  such  as  this 
one,  has  needed  capital,  and  has  used  the  stock  market  as 
a  means  to  procure  it.  This  industry  developed  after 
the  period  of  combination.  The  General  Motors  Co.  was 
formed  in  1908;  but  this  company,  large  as  it  was,  up 
through  1916  never  produced  much  more  than  about  10 
per  cent  of  the  total  output  of  the  industry.  Ford,  how- 
ever, produced  more  than  35  per  cent  of  the  total  output 
of  1916;  and  seven  companies  produced  more  than  75  per 
cent  of  the  total  production  of  automobiles  in  1916.     These 

1  Obtained  from  the  reports  of  the  Association  and  the  Census  of 
Manufactures. 

95 


96 


THE   CAPITALIZATION   OF   GOODWILL 


companies  were :  Ford,  General  Motors,  Studebaker,  Willys- 
Overland,  Chevrolet,  and  Maxwell. 

The  popularity  of  the  cheaper  variety  of  automobiles 
and  probably  a  decreasing  cost  of  production  are  shown  by 
the  following  average  prices  paid  for  automobiles  between 
1904  and  1914: 

1904 $1,382 

1906 1,850 

1908 1,621 

1910 1,203 

1912 1,000 

1914 940 

2.  Reasons  for  the  Preferred  Stock  Flotations 

The  preferred  stocks  of  Studebaker  and  of  Willys-Over- 
land were  floated  in  191 1  and  1912.  The  Ford  Co.  is  prac- 
tically a  closed  corporation,  and  the  reincorporation  of 
General  Motors  in  19 16  was  not  the  result  of  the  same 
motives  that  were  effective  in  the  case  of  Studebaker  and 
Willys-Overland.  Studebaker  and  Willys-Overland  were 
incorporated  in  191 1  and  1912  for  the  purpose  of  acquiring 
new  capital  for  expansion.  It  was  about  this  time  that  the 
industry  began  to  expand. 


3.  The  Profits  of  the  Automobile  Companies 

The  ratios  of  the  profits  to  the  investments  (i.e.,  the 
percentage  earned  on  investment)  of  automobile  companies 
between  191 1  and  191 7  were  as  follows: 


191Z 

1912 

1913 

1914 

1915 

1916 

1917 

Studebaker 

11^3 

9.9 
I6.2« 

7j9 

7.5" 
30.0 

16.2 

14.3 
15.5 
28.6 

28.3 
67.9 
21.6 
33.8 
48.3 

26.2 
47.6 
45.0 
20.5 
64.1 

139 
16.0 
33.0 

Willys-Overland 

Maxwell 

Packard 

General  Motors 

54.1 

These  automobile  companies,  like  so  many  others,  pros- 
pered remarkably  during  1915  and  1916.  In  191 7,  how- 
ever, there  was  a  decrease  in  the  return  on  investment,  due 
in  part  to  the  increase  in  investment  in  all  cases  except  that 

"  Fiscal  year. 


APPENDIX  III 


97 


of  Studebaker.  The  decrease  in  the  sales  of  Studebaker  in 
191 7  explains  the  poor  showing  of  this  company  in  that 
year. 

4.  The  Equity  in  the  Preferred  Stocks 

The  automobile  preferred  stock  issues  were  conservative, 
as  is  shown  by  the  ratios  of  the  preferred  stocks  to  the 
tangible  assets: 


1911 

1912 

1913 

19 14 

1915 

1916 

1917 

Studebaker 

1.67 

1.80 

2.18 
1.86 

2.19 

3-93 
1.87 

3.06 
3-96 
4.61 
2.08 

349 
4.85 
5-35 
3.10 

2.95 
4-38 
310 
4.12 

Willys-Overland 

Maxwell 

General  Motors 

The  prices  of  these  preferred  stocks  were  as  high  as 
might  have  been  expected  in  view  of  their  redemption 
values. 


1012, 

High-Low 


Higl 


gh-LoM 


High-Lov 


IQIS. 
High-Low 


1916, 
High-Low 


Higl 


;h-Low 


Studebaker .... 
Willys-Overland 

Maxwell 

General  Motors 


98-90 
101-99 

83-70 


93-64 
99-80 

35-18 
82-70 


92-70 
96-90 
48-22 
95-70 


I 19-91 

115-95 
104-43 
136-90 


I 14-108 

117-  94 

93-  65 

98-  89 


108-85 
100-92 

74-49 
93-85 


5.  The  Common  Stocks 

The  percentages  earned  on  the  common  stocks  of  the 
companies  were  as  follows : 


1912 

1913 

1914 

1915 

Z916 

191 7 

Studebaker                  

5-9 

3.6 
38.0 

14.2 

11.7 
38.0 

27.4 
52.5 
15.6 
82.0 

26.1 

40.0 

20.9 

170.0 

91 
21.0 

Willys-Overland    

Maxwell 

General  Motors 

30.7 
170.0 

APPENDIX  IV 

The  Chain  Store  Stock  Flotations 
I .  The  Development  of  the  Chain  Store 

The  chain  store  dates  back  to  about  1870.  Between 
1890  and  1900  it  became  a  vital  factor  in  American  indus- 
trial life.  The  chain  stores  have  had  a  marked  tendency 
to  reorganize  our  distributive  system,  by  gradually  replacing 
the  jobber  and  the  broker  and  by  introducing  the  advan- 
tages of  large  scale  production  into  retail  business.  In  19 16 
there  were  six  firms  in  Philadelphia  operating  461  chain 
stores.  The  chain  stores  have  invaded  many  fields ;  depart- 
ment stores,  shoe  stores,  hat  stores,  cigar  stores,  restaurants, 
drug  stores,  grocery  stores,  and  five  and  ten  cent  stores,  etc. 

Of  all  the  industrial  corporations  considered,  none  have 
been  more  successful  than  the  chains  of  five  and  ten  cent 
stores.  In  1879  the  first  of  the  F.  W.  Woolworth  stores 
was  opened;  from  the  surplus  profits  of  that  store  another 
similar  store  was  opened.  The  success  of  those  two  stores 
made  possible  the  establishment  of  other  stores  in  other 
localities.  In  191 5  Woolworth  had  797  stores  located  in 
every  State  except  Arizona,  and  in  forty-six  Canadian 
cities.  The  Kresge  chain  started  in  1877,  and  had,  per- 
haps, an  even  more  phenomenal  growth. 

The  Acme  Tea  chain  and  the  Jewel  Tea  chain  were  begun 
in  1885  and  in  1899  respectively.  The  Acme  Tea  Co.  is  one 
of  the  chain  stores  for  which  Philadelphia  has  become  noted. 
In  191 8  this  company  had  441  stores  in  Philadelphia,  and 
also  had  stores  in  eighty  cities  and  towns  in  the  eastern 
part  of  Pennsylvania  and  New  Jersey.  The  Jewel  Tea  Co. 
originally  operated  chain  stores  in  Illinois;  but  in  1918  there 
were  550  branches  in  all  the  principal  cities  of  the  United 
States. 

98 


APPENDIX  IV 


99 


2.  The  Reasons  for  the  Chain  Store  Flotations 

The  Woolworth  flotation  was  brought  out  in  the  be- 
ginning of  1 912,  and  the  Kresge  Flotation  followed  shortly 
afterwards.  These  companies  apparently  had  no  par- 
ticular need  of  new  capital,  nor  did  they  have  large  debts. 
The  owners  wanted  to  withdraw  their  investments,  and 
put  their  consolidated  chains  on  the  market. 

3.  The  Sales  and  Profits  of  the  Chain  Stores 

The  sales  of  the  five  and  ten  cent  stores  have  not  in- 
creased so  rapidly  on  the  whole  as  those  of  the  grocery 
chains,  although  the  sales  of  the  Kresge  showed  remarkable 
growth.  The  following  figures  show  the  increases  in  sales 
(1912  was  taken  as  a  base  of  100). 


1913 

1913 

1914 

1915 

1916 

1917 

Woolworth 

Kresge 

100 
100 
100 
100 
100 

109 
128 

113 
104 
146 

115 
156 
103 
127 
175 

125 
203 
118 

159 
227 

144 
285 
142 

193 

357 

162 
291 
164 
259 

439 

McCrory 

Acme 

Jewel 

I 


The  volume  of  the  sales  of  Woolworth  resulted  in  a  less 
rapid  percentage  increase.  Jewel  Tea  and  Acme  Tea 
showed  great  absolute  increases  in  191 7;  this  was  probably 
due  in  part  to  their  expansion  after  their  flotations  of  1916. 

The  ratios  of  profits  (profits  and  interest)  to  sales  show 
that  Woolworth  and  Jewel  Tea  probably  derived  more 
benefit  from  their  expansions  than  the  other  companies, 
whereas  the  margin  in  the  case  of  Acme  was  small.  The 
percentages  of  profits  earned  on  sales  were  as  follows : 


191S 


'913 


X914 


191S 


1916 


1917 


Woolworth 
Kresge.  .  . 
McCrory .  . 
Acme .... 
Jewel 


8.9 
6.4 
6.7 
4.1 
11.7 


9.7 
6.5 

7.2 

5.9 
7.9 


9.2 

71 

6.2 

4.2 

14.9 


9-9 
6.2 

6.3 

3-5 

17.9 


lO.O 

7.2 
6.2 

3-9 
11.4 


9.4 
6.2 
4.1 

4-5 
9.8 


lOO 


THE  CAPITALIZATION  OF  GOODWILL 


4.  Earnings  on  Investments 
The  returns  of  these  companies  were  as  follows : 

1917 


Woolworth 
Kresge .  .  . 
McCrory.  , 

Jewel 

Acme 


I9I2 

I9I3 

19 14 

i9ii 

1916 

36.8 

36.3 

36.4 

33-9 

34.7 

27.0 

29.0 

33.8 

29.2 

18.0 

— 

— 

15.6 

17.3 

— 

— 

— 

24.9 

— 

— 

— 

25.0 

32.6 

139 
II.7 
25.0 

34-9 


All  of  these  chain  stores  earned  large  percentages  on  their 
investments,  except  possibly  McCrory.  Woolworth  made 
exceptionally  high  returns  on  investment.  Acme  and  Jewel 
also  earned  large  profits  on  investment. 


5.  The  Preferred  Stocks  of  the  Chain  Stores 

The  preferred  stocks  of  the  five  and  ten  cent  chains  were 
especially  conservative.  The  ratios  of  the  tangible  assets 
to  the  preferred  stocks  were  as  follows : 


1912 


191S 


1916 


1917 


Woolworth . 
Kresge .  .  .  . 
McCrory.  , 

Acme 

Jewel 


1 00.0 
122.3 


122.4 
150.0 


140.7 
170.0 


159.7 
224.6 
180.0 


185.7 
340.0 
194.9 
104.5 
148.5 


210.5 
420.0 
219.4 

148.5 
1 74. 1 


The  market  prices  of  the  preferred  stocks  were  as  follows: 

1912 

1913 

1914 

191S 

1916 

1917 

Woolworth  . 

Kresge 

McCrory .  .  . 

Jewel 

Acme 

I 18-109 
105-100 

11S-109 
102-  96 

I I 8-1 12 
105-  99 

124-115 
I 12-104 

126-123 
12-10* 

I 13-104 
98-  93 

126-113 

1 13/8-83/4'* 

112-  90 
96-  92 

A  higher  price  than  the  redemption  value  ($125)  for 
Woolworth  preferred  stock  was  reached  in  both  19 16  and 
191 7.  Kresge  preferred  stock  would  probably  have  risen 
higher  had  it  not  been  for  the  redemption  value.  The 
value  of  these  preferred  stocks  rose  as  the  earnings  were 
accumulated  to  increase  the  assets  and  replace  the  goodwill. 


*  Reorganization  (Par  value  $10.00). 


APPENDIX  IV 


lOI 


k 


6.  The  Common  Stocks 

The  percentages  earned  on  the  common  stocks  of  these 
companies  were  as  follows: 


Woolworth . 
Kresge.  .  .  , 
McCrory.  . 

Jewel 

Acme 


I9I2 

I9I3 

I9I4 

1915 

1916 

12 

15 

20 

23 

20 

9 

II 

II 

13 

5 

16 

7 

— 

— 

— 

— 

10 
14 

1917 

17 
17 

5 
II 

25 


The  comparatively  large  common  stock  issues  of  McCrory 
and  of  Jewel  Tea  explain  the  smaller  percentages  earned  on 
those  common  stocks  in  1916  and  1917.  The  companies  in 
this  group,  however,  were  not  so  much  overcapitalized  as 
those  in  some  of  the  other  groups. 

The  prices  of  the  common  stocks  were  as  follows : 


I9I2 

I9I3 

I9I4 

I9IS 

1916 

118-76 

89-47 

I 12-81 

83-58 

III  1 1 

0  0 

Cn  On  K> 

1  11"!? 

Cn  vO  vO 
0  VO  0 

I4I-II8 

16-  I0« 

96-67 
69-   51 

I9I7 


Woolworth 
Kresge .... 
McCrory . . 

Jewel 

Acme 


155-100 
13-  10* 

78-  31 
58-  52 


These  stocks  show  no  close  relations  to  the  earnings  on  the 
common  stocks. 


«  Par  value  reduced  from  $100  to  $10. 


INDEX 


Acme  Tea  Company,  28,  45,  75, 
76,  77,  98,  99,  100,  loi. 

Adriance,  Piatt  and  Company,  84. 

Advance  Thresher  Company,  83, 
84.    . 

Advertisement,  value  of  flotation, 
20,  28,  70. 

Agricultural  Implement  Compan- 
ies, 22,  28,  30,  49,  50,  74,  79,  83, 

84,  85,  86,  87,  88. 
Ajax-Grieb  Company,  44,  48. 
Ajax  Rubber  and  Tire  Company, 

46. 
American  Tobacco  Company,  10, 

.  ^9.  .      . 

Amortization,  65. 

Annalist,  75,  (note),  77  (note),  83. 

Armsby  Company  of  New  York, 

45,  46,  48,  60,  62. 
Armstrong  Investigation,  19. 
Automobile  Companies,  28,  40,  50, 

95,  96,  97. 

Baldwin's  List  of  Early  Incor- 
porations, 16. 

Banker,  investment,  23,  24,  26,  27, 

^  32,  33,  34,  68,  74. 

Barnhart  Brothers  and  Spindler, 
44.  ^ 

Bond  issues,  67,  69. 

Bonus,  II,  26,  27,  34,  35. 

Brown  Shoe   Company,   25,   44, 

^  46,  57,  59,  62,  70,  71,  79. 

Burns  Brothers,  45. 

Burt  Olney  Canning  Company, 
29  (note). 

Capitalists,  12,  15. 

Case,  J.  I.,  22,  32,  44,  75,  76,  84, 

85,  86,  87,  88. 

Chain  stores,  98,  99,  100,  loi. 
Chesapeake  and  Ohio  Railway,  54. 
Chevrolet  Motor  Company,  96. 
Claflin  Company,  H.  B.,  55. 
Clothing  Companies,  28. 
Combinations,  10,  16,  17,  20,  28, 
29,  80. 


Commercial  banks,  30. 
Continental  Can  Company,  45,  46, 

56,  62. 
Cordage  consolidation,  18. 
Cordage  pools,  16. 
Cumulative  feature   of   preferred 

Stock,  55,  56. 

Debentures,  31,  53,  54,  59. 
Deere  and  Company,  22,  44, 65,66, 

67,  75,  76,  77,  84,  85,  86,  87,  88. 
Defaults   in  preferred    dividends, 

59. 
Department  stores,  49. 
Dewing,  Arthur  Stone,  19,  80. 
Diamond  Rubber  Company,  21, 

80,91. 
Dissolution,  60,  66. 
Dividend  policy,  71,  72,  73. 
Dred  Scott  Case,  17. 

Earning  power,  41,  44,  45,  50. 
East  India  Company,  53. 
Emerson- Brantingham  Company, 

22,  44,  61,  63,  64,  75,  76,  77,  84, 

85,  86,  87,  88. 
Entrepreneur,  12,  13,  15,  38. 
Expansion,  21,  25,  29,  30,  31,  32. 

Firestone  Tire  Company,  90,  92, 

93,  94. 
Fisk  Tire  Company,  21,  25,  44,  57, 

89,  90,  91,  92,  93,  94. 
Five  and  ten  cent  stores,  21,  28, 

73. 
Ford  Motor  Company,  95,  96. 

Gaar  Scott  Company  83. 
General  Motors  Company,  95,  96, 

97. 
Goldman,   Sachs   and   Company, 

19,  20,  21,  32,  46. 
Goodrich  Company,  B.  F.,  20,  21, 

26,  28  (note),  30,  44,  62,  65,  70, 

71,  73,  74,  75,  76,  n,  79,  80,  90, 

91,  92,  93,  94- 
Goodwill,  II,  13,  27,  40,  41. 


103 


104 


INDEX 


Goodyear  Rubber  and  Tire  Com- 
pany, 21,  25,  46,  59  (note),  74, 
76,  m,  90,  9i»  92,  93»  94- 

Greene,  T.  L.,  54  (note). 

Griffin  Wheel  Company,  45. 

Hart-Parr  Company,  44,  46,  48. 
Hart,  Schaffner  and  Marx  Com- 
pany, 28,  44,  46,  71,  72. 
Hupp  Company,  44. 

Indebtedness,  liquidation  of,  21, 

25,  29,  30,  31,  32. 
Interest,  12,  37,  38. 
International  Harvester  Company, 

9,84. 
International  Shoe  Company,  44. 
Interstate  Commerce  Act,  17. 
Investment    value    of    industrial 

stocks,  14. 
Investors'    Manuals,    75    (note), 

77  (note),  83. 

Jewel  Tea  Company,  28,  45,  62, 
63,  75,  76,  n,  98;  99.  100,  loi. 

Joint-stock  companies,  15. 

Jones  Brothers  Tea  Company, 
47  (note). 

Kaufman  Department  Stores,  44. 
Kayser,  Julius  and  Company,  9, 

25,  44.  59.  62,  63. 
Kelly-Springfield  Tire  Co.,  44,  46, 

48. 
Kelsey  Wheel  Company,  45. 
Kirschbaum,  A.  B.,  44. 
Kresge,  S.  S.,  21,  28,  30,  44,  70,  72, 

73  (note),  74,  75,  76,  77,  79,  98, 

99,  100,  1 01. 
Kress,  S.  H.,  44. 

Lake    Superior    and    Mississippi 

Railroad,  54. 
Leather  consolidations,  18. 
Limited  liability,  16,  54. 
Loose  Wiles  Biscuit  Company,  25, 

45.  48,  57,  59  (note),  70,  74,  79. 

McCrory,  22,  28,  44,  76,  99,  100, 

lOI. 

McElwain  Shoe  Company,  44,  46, 
48. 

Manhattan   Shirt   Company,   32, 

44,  46,  62,  70. 
Maxwell  Motor  Company,  44,  48, 

74,  75,  76,  77.  96,  97- 


May  Department  Stores,  28,  30, 
,  44,  58,  59,  63,  70,  79,  80. 
Mediaeval  guilds,  corporate  ideas 

in,  15,  27. 
Moline  Plow  Company,  22,  25,  32, 

44,  76,  84,  85,  86,  87,  88. 
Monopoly,  15,  16,  17. 
Moody's   Manual  of   Industrials, 

43  (note),  76  (note),  83. 
Mortgage,  53,  59,  64. 

National  Cloak  and  Suit  Com- 
pany, 45,  62. 

New  York  Stock  Exchange,  12,  19, 
28,  43,  46,  73,  74. 

Northern  Securities  Case,  10,  18. 

Overcapitalization,  13,  72. 
Owens  Bottle  Machine  Company, 

45.  46,  48.  59- 

Packard  Motor  Car  Company,  96. 
Panic  of  1893,  18. 
Panic  of  1907,  31. 
Partnership,  9,  15,  19,  47. 
Peabody,  Cluett,  34,  44,  63,  73,  79. 
Perpetual  succession,  15,  20,  27. 
Pettibone  Mulliken  Company,  45, 

59  (note),  61,  63. 
Pierce,  Butler  and  Pierce,  44. 
Poor's  Manual  of  Industrials,  43 

(note),  83. 
Preferred  dividends,  12,  39,  75. 
Preferred  stocks  as  investments. 


Pro 


14,  79. 
fit,  37.  38. 


Promoters,  17,  23,  24,  27,  33,  34. 

Railroad  preferred  stocks,  54. 
Redemption    value  of  preferred, 

61,  75. 

Rich  Man's  Panic,  19. 
Risks  of  capitalist,  13,  38. 
Rubber     Goods     Manufacturing 

Company,  90. 
Rubber  Tire  Companies,  89, 90,  91 

92,  93,  94- 
Rumely,  M.,  22,  26,  30,  44,  57,  60, 

62,  64,  66,  75,  76,  83,  85,  86,  87, 
88. 

Salary  limitation,  58. 

Salomon  and  Company,  Wm.,  21, 

22,  44,  48,  63. 
Scott,  W.  R.,  15  (note),  16  (note), 

53  (note). 


INDEK 


105 


Sears  Roebuck  Company,  9,  12, 
19,  28  (note),  45,  46,  65,  70,  79. 

Second  preferred  stock,  11,  48. 

Seven  per  cent  preferred  stock, 
9,  12. 

Sherman  Anti-Trust  Law,  10,  17, 
18,29. 

Sinking  fund  provision,  61,  62,  63. 

Sonneborn  Company,  Henry,  32, 
58,  62  (note). 

Spicer,  55. 

Standard  Oil  Company,  10,  17,  19. 

Stansfield,  Frisbie,  44. 

Starch  consolidation,   18. 

Stern  Brothers,  32,  67. 

Stevens,  W.  H.  S.,  16  (note). 

Stock  dividends,  72. 

Stock  exchange,  9,  78. 

Studebaker  Motor  Company,  9, 
25,  28,  44,  46,  49,  59,  63,  66,  67, 
71.  73,  75,  76,  77,  96,  97. 

Syndicate,   underwriting,   23,   33, 

34. 

Tangible  assets,  40,  44,  45,  49,  50, 

51,  56,  74,  75,  76. 
Tires,  rubber,  21,  28,  30,  49,  50. 
Trade  names,  79. 


Trusts,  10,  16,  18,  28. 

Underwood  Typewriter  Company 

28  (note),  45,  46,  58,  59,  60,  63 
70,  74-.  . 

Underwriting  syndicate,  23,  33,  34 
United  Cigar  Manufacturers,  12 

19,  62  (note),  65. 
United  East  India  Company,  16 
United  Five  and  Ten  Cent  Stores 

29  (note). 

United  States  Rubber  Company 

9,  89,  90,  91,  92,  93,  94. 
United  States  Steel  Corporation,  9 

Voting  power,  27,  47,  59,  60,  64. 

Walker,  A.  H.,  17,  18  (note). 
Walker,  Francis,  38  (note). 
Watered  stock,  26. 
Willys- Overland  Motor  Company, 

9, 44, 57, 63,  71,  75, 76, 77. 96, 97- 
Withdrawal  of  capital,  21,  25,  29, 

30,31,32,42,43. 
Woolworth,  F.  W.,  9,  21,  22,  26, 

28,  30,  44,  46,  63,  65,  70,  72,  73, 

74,  75,  76,  77,  79,  80,  98,  99,  100, 

lOI. 


VITA 

Kemper  Simpson  was  born  in  Chattanooga,  Tennessee, 
April  7,  1893.  He  attended  the  public  schools  of  Baltimore, 
and  received  the  A.B.  degree  from  the  Johns  Hopkins 
University  in  19 14.  He  then  entered  the  Department  of 
Political  Economy  for  graduate  work. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


AUG  12  1935 


yJan'64DV/ 


AUG13193S 


REC'D  LD 


^ 


M 


ts^ 


JAHlS'BA-llft" 


SHNTONfLL 


t^ 


tjtfr 


aq 


JUL  3  0  2001 


U.  C.  BERKELEY 


nrc  15  ^93^ 


FEB  1 0  1948 


8Nov'6IMT 
K   ..... 


OCI  25  1961 


LD  21-100m-8,'34 


r 


465003 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


.  i*j* : 


^ 


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